Nifty In Technical Charts: Turn Selective On Longs

The main event of the week ended was of course the budget. Even though the FM had earlier stated that no decision of any importance would be taken, the media made much of the event, hyping it up to the sky, painting expectations out of nothing. Those that bought into the hype were forced into dumping their longs.

The market then ran true to its recent volatility, springing back quite strongly once again on Friday, scaling new highs before getting slammed a bit (particularly, the Bank Nifty). But, the new high was good enough to get the juices flowing once again and even more so in the context of the Nifty managing to sustain some gains to the end.

Writing in the letter of the earlier week, I had stated that the banks were in a situation to rally from an oversold status and we did see a 1,800-point rally. May not look like much on the daily chart (considering the earlier drops) but that was plenty to trade easily during the week. Also, the fact that I had specifically mentioned that the PSU banking pack would do a lot better and accordingly, we saw some super moves in stocks like SBI, Bank of Baroda, Canara Bank and PNB. This sector was probably one of the best sectors to trade during the last week. There was some sideshow of positivity from pharma and metals as well, making the rally somewhat enjoyable to trade. More pertinent long-term comments were also made in the last week's letter about PSU bank stocks and readers are referred to that letter to make note of the long-term views.

But the selling of mid-session on Friday took the bulls by surprise as it came without a warning. Chart 1 shows the sudden and unexpected move.

The Bank Nifty fared much worse than the Nifty actually. The weakness continues to sustain for the Bank Nifty as it struggles to rally while the Nifty punched out all-time new highs. The week started with a gap up-move on last Monday, signalling the rally intent mapped for the Bank Nifty and the progress through the week also seemed acceptable. But the selloff on second half of Friday has now created once again some uncertainty in the minds of traders.

So, for active traders, the gap zone of last Monday could be the nearest stoploss zone on longs created (near 45400). A similar gap zone exists for the Nifty as well (at 21550) and the same logic for stops on active longs can be kept here.

Writing about longer duration trade stops in the letter two weeks ago, I had stated that those were still placed near 21k levels and these were not really troubled in the fall of the earlier week. Now that a new high has been established, a revision of swings would have to be calculated. The most recent swing low at 21141 now becomes the nearby stop for swing traders. This is also quite close to the earlier stop zone at 21050.

The reason why I am speaking more about the lower levels is because at this stage of the market, we should be more worried about protecting our gains than anything else. In that context, if one looks at the index chart on daily time frame, then what also emerges is a broad consolidation for the past several weeks. See chart 2.

In the chart a broad rectangle is marked where we can see volatility increase after sustained trended price move. Three touches to the top of the rectangle have now occurred and two at the lower end of it. It is time for some breakout to occur.

The chart also has RSI levels converted into zones on the price chart so as to get a faster and better reading of momentum changes. The low of the current RSI bull zone (marked in green) is around 21550 levels. Once that gets tripped, trends could change. The bottom of the rectangle is around 21100. So, the tipping zone would be between 21100-21500. We dipped into that the earlier week but managed to recover. It is time to therefore keep a sharp lookout for any trip-up of this zone. Very often, consolidation with volatility at high price levels is a signal of distribution.

If one recalls the 2024 forecast given at the start of the year, I had plotted the Nifty to show a good rally that creates a marginally higher high in February before a decline. The current move is that portion of the forecast. Current momentum may see some spillover into next week, perhaps till Feb. 9. Chart 3 shows the forecast for the rest of the month. It shows the possible pathway of price (up targets and down reaction levels) and time (Feb. 22-24).

This is a guidance. Remember my oft-quoted adage, ‘Trade the market, not the forecast’. If the market follows the projected pathway here, then follow actively; if it deviates, then follow with caution; if it doesn’t, then don’t follow.

As far as other sectors are concerned, the PSU banking pack continues to look interesting. Table 1 shows the situation in sectors.

I don’t see anything disturbing the gainers order as the toppers still have momentum in them to continue. Metals just began their momentum on Friday and so should be in play next week. Pharma, too, may remain active. Oil and gas, energy to continue their uptrends.

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 NDTV Profit or its editorial team.