Nifty In Technical Charts: Most Of The Selling Done?

Can one claim this is a five-leg drive down, and thereby setting for a larger correction? Perhaps. It is a fact that we have not had such a pattern any time during the past corrections. So, this has to be given weight.

Second, the decline set in from a projected resistance (discussed in last week’s letter). Chart 2 is an updated version of the chart given last week. We had discussed the prices reaching the top channel of a Schiff pitchfork drawn to the daily chart. Hence alarm was raised about the possibilities of a halt here. So, a five-leg drive down coming from this juncture lends some more meaning.

In the attached chart, prices are seen exiting the pitchfork lower channel. That is suggestive of more declines to come. But if I use a line chart, the pitchfork gets somewhat adjusted (especially at the starting point of June 4) and here, the low of last week is right on the lower channel. But I have shown the candle chart because we have been using them all along, and I don’t want to shift to another chart for the sake of convenience.

So, let’s roll with it as is. If repair has to be done, then it would mean that the Nifty needs to revive from current levels. Also, if prices continue to fall, it will change the relationships of the five-leg decline and that has a different import altogether — something that we can deal with later. Suffice to state that if it were to occur, then we are looking at deeper corrections. Not good news.

Lots of videos out there stating how they managed to get the high price right. I am sure many have seen these. But the more important question to ask is whether a reversal was predicted from the expected target! There lies the difference! TA allows you the luxury of giving one target after another — that is the easy part. The real deal is, what you do, if and when, those targets are hit? If that question is not answered, then target forecasts are largely irrelevant or just incidental. Our letter last week was quite clear about what to do with the projected high — take some money off the table or tighten your stops.

In the letter last week, I had stated that Oct. 3-4 would be the first turn date for the month and linked that up with price action. Ideally, one would have liked to see a top formation on the turn date. But market got into action from Monday, stalled for a day on Tuesday and on the last two sessions, got smacked down to the canvas by some relentless selling from the FIIs. The figure for the foreign outflow for Thursday was close to Rs 1 lakh crore if one combines both futures and cash numbers. Can’t recall such a sustained bashing in recent past. Evidently, this is long liquidation and not profit taking. The patterns and the aftermath of these two types of selling are different.

In long liquidation, there is determined selling through the day and there won’t be an intraday rally at all. See Chart 1 and note how sustained the pattern of decline is — not a single rally in all three declining sessions while the quantity was being sold. It is only after the quantity for the day was completed that you saw some small pops. But since the activity emerged again on the following two sessions, trying to look for targets or bottom fish would have blown up in the face.

In profit taking type selling, usually you see small drives lower followed by quick rallies and there would be intraday pops on a regular basis.

The derivative long position was liquidated big time. From an all-time high of 3.36 lakh, index futures longs were trimmed by about 65% in a single day last Thursday. By Friday, these longs finished at around 82,000, indicating an exit of 75-80% of the longs at the start of the week. This was the main reason behind the damage. Chart 3 shows the sharp cut in positions. You can see that the positions were smashed down to even below September beginning levels!

But before we get all hot under the collar about the whole gig being over, take a look at the big picture. Chart 4 shows Nifty 50’s progression in different time frames.

While the short-term (up to 1 month) certainly has suffered reversals, looking at larger time frames show that the decline is not overly significant. That should quieten the fears of those thinking it’s all over. So, hold your horses, and treat this as the way it should be — as a short-term reaction.

If this is the case, then our job is to examine for supports to the current fall. In the earlier part of this letter, I mentioned that the index may already have reached some supports and how, if that has to be right, then rallies must occur right away, starting from Monday. Chart 5 shows some esoteric channels and arcs that further attest to this observation. Here, I can add that if the Nifty futures manages to hold above Friday lows till Oct. 9 mid-session, then chances are that the low for this decline is in. So, current lows and two days into the next week is what we need to watch. In addition to this, there are clustering of Fibonacci retracement supports around the current levels too.

However, if that were not to happen and the fall continues, then we need to look at retracement levels. Using a smaller swing, we get levels of 24,875. Using Gann numbers, we get clusters around this area at 24,900 and also 24,965. An external retracement technique of Duffy places the support at 25,070. So, seems like not much to go before index runs into supports once again. We need not fear Armageddon if lows break.

Assuming that prices may go to those lower levels, it would still be in the 5-6% zone of a correction from the top. That is still within normal ranges and once again, speaks of an uptrend that is still in progress.

Many people are troubled by the fact that the Nifty hasn’t had a ‘decent’ correction. Now, that is not really true. If you examine this year’s trading, we have had reactions of 3-5% almost every month! The smash of June was approximately 11%. That it was recovered in a single session is another matter. In a reaction, we look for the extent of damage not just in price and time but also the impact it had on the carried positions. In my opinion, the June decline washed out most of the positions in a single day. So that ought to count for a valid reaction. Since there were regular pullbacks with liquidation going on every time (even the current one wipes out the FII leverage in Index) the market never went on to become overbought! What did you want? A 3-month drive with a 10% smash? Not happening guys.

So, all those who feel a big correction is still due, I would say, think again! Stocks and sectors also took their turn too with periodic dips. Valuations can get out of whack, but that does not mean stock trends will get overdone — these two are independent.

Hence it is probably a case of sour grapes — mainly because people couldn’t get in at favourable (according to them) prices and ride the trends comfortably!

One point about recovery from declines. Data shows that deeper a correction goes, the longer it takes to recover from them. So, don’t look for a post June type of action. It will possibly be a bit laboured and hence slow. So, no new highs maybe in rest of October. This means some to-and-fro for coming week or two. Chart 6 shows the resistances overhead — gaps, island reversal, prior consolidations, pivot zones, etc.

There are no immediate turn dates that I can see. The next important one I get is at end of the month, around Oct. 28-30. A minor one is also seen for Oct. 22. Look for price matches during these time windows, and for patterns as well to plan for reversal trades.

This letter has got long and winded. Still lots more items to discuss really — annual projection map for the last quarter, SEBI changes to F&O markets and how I perceive those to impact the market as a whole, September quarter results expectations, the 97% loser traders data and what that indicates, etc. But we shall leave that for future letters.

I am off on a holiday for about three weeks. Next letter will be in end-October.

Meanwhile, I leave you with these conclusions.

Market has taken a knock, but it has got deleveraged too. Prices have slid into supports and there are more supports just beneath the current levels. Hence not expecting big declines to emerge even if last week lows are broken. For those playing a bit longer (than a day), it is time to be looking for buy signals. Fortunately, results season start kicking in from Oct. 10. There should be enough news supply and activity to take our minds off Israel and crude and the Dow, etc. We do nothing with those anyway except create some local panic!

Pace of recovery may not be too brisk, so be prepared to deal with dull times. Good results will get bought into since index has pulled back some and stocks have pulled back a lot too. So, do pay attention to results and be alert to act.