For the past two weeks, I had been maintaining a negative viewpoint, suggesting that the Nifty should head towards the 19,200-19,000 area. In the write-up of mid September, I had this to say. “My cycle studies indicate that October will not be a bullish month. I had already warned that beyond the first week to 10 days in September, the trends may start to falter. Volatility has set in. I expect this to continue into October as well.”
The market has been churning for the last seven weeks without hitting a new high. If one looks at different indices of the market, it will be found that most of them show a consolidation pattern over the last seven weeks. It doesn’t matter whether the index is of large caps, or mid, or small caps, or from some sector. Almost all of them wear the same look.
What this says about the market is that it is undergoing some consolidation, as it digests the strong upmove of the last few months and the various changes that are occurring simultaneously across different markets.
This is true not just for our markets but also the global markets, chief among them being the U.S. The changes have been many. The U.S. 10-year bond yields, for example, have surged to a 16-year high at near 5%. JPMorgan chief had earlier warned about (an unthinkable) 7% levels also for bond yields.
Typically, rising bond yields are negative for equities. Despite this, the stock prices (particularly of the big seven) have remained quite steady and even the S&P 500 valuation remains at around the same levels through the year, implying that nothing has gone out of whack with valuations. See Chart 1 showing the bond yield surge.
The Dollar index has been gathering strength and with the latest surge of yields and the Fed’s rather confusing statements at the last meeting, the Dollar is seen gaining strength. The upsurge was signalled by the momentum indicator back in early August and it has now progressed to the top of a resistance zone defined by adaptive averages. A breakout here seems imminent. This is shown in Chart 2 where we have shown both the DXY index as well as the chart of the USD-INR pair. In the currency pair, we can notice a triangle pattern breakout that implies further weakness to come in the Rupee. The pattern target would suggest a move to 85.50 in the weeks ahead.
This has an implication for our markets, because there is a bit of negative correlation between our currency direction as well as the equity markets. The FII inflow interferes with this correlation every now and then, overwhelming the negative correlation when the inflow is high. But now, we have what looks like a range breakout in the pair’s chart, coupled with the possibility of a breakout in the Dollar index chart (awaited) and the recent trends of FIIs pulling money out of the market. Therefore, it is quite possible that the negative correlation can set in. Hence, we need to watch the pathway of the U.S. yields for U.S. interest rates and consequently, the strength in the Dollar, the FII outflow and the movement in the Rupee.
Complicating things a bit further in this pot could be the steady trends in SIP flows (Rs 16,000 crore last month). Now, this steady inflow is making a big difference in the continuing flow of DII money to the markets, offsetting, to a great deal, the weakness posed by FII funds' withdrawal.
So, it is all linked now at the macro levels. Here, other factors such as government polices, RBI action, seasonal demands, etc., all get into the mix and hence, it is going to be a difficult time to tell which is going to impact trends the most. Suffice to say that price action is the final output of all these considerations, and therefore our focus shall remain on that and we should be able to decipher our way out of this.
In and through all this, what have our indices been up to? Well, in the short term, they have been true to the text, drifting lower, slowly, working out recent excesses. The balance weeks of October are also not looking too good from a bullish angle. And hence, we can expect succour only next month.
Here, I show the time analysis carried in the earlier letter outlining the possible trends for October. See the table shown. The circled area is for the balance of the month and note that there is not a single day with bullish bias shown. Hence, the situation can turn a bit worse now before turning better. I will feature the chart for November next week.
Writing about this feature in Neotrader in the earlier week letter, I had written, “…that the probabilities for some market strength for the next couple of weeks is rather low. Given that as a background, we should be looking for more shorts than longs. It could also mean that the results across the next week or two are not really going to light up the Street!” Clearly, the flow of results since then has hardly been exciting.
On the Nifty chart, using the pitchfork (see Chart 3), we can note that the prices are headed for the lower channel, placed around the 19,400 area. The last swing low (19,362) will be under threat once these areas are approached or broken. Hence, matters are a bit dicey.
Looking at the Bank Nifty, here too, I find that the prices have broken the median line and are trading at the levels of the main support trendline. Any further break here will probably carry prices lower towards 41,800 areas. If this happens, then it can drag the Nifty down as well. So, here we are at such a stage where the Nifty finding support and rallying may rescue the Bank Nifty, while a decline in the Bank Nifty can drag the Nifty down.
This time, big banking results (ICICI Bank Ltd. and Kotak Mahindra Ltd., along with Yes Bank Ltd.) are set for Saturday. So, there is a chance for a gap up or down move possible when market opens for next week. Hence, a bit tricky here as well.
So, with global cues not so good, with results flow being mixed, with indices testing supports, and not exactly clueing us about further direction and finally, with time counts not in support, being a bull in the coming week may be fraught with some danger.
About a month ago, I had suggested that traders should rest a bit easy. Well, that advice continues to remain valid at this juncture. Tread carefully. It is not that opportunities will not be there. But you may have to search with a lot more diligence to find them.
CK Narayan is an expert in technical analysis, the founder of Growth Avenues, Chartadvise, and NeoTrader, and the chief investment officer of Plus Delta Portfolios.
The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.
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