When the Nifty future hit 25,132 on Aug. 1, it had almost hit the targeted zone of 25,200. Since the market dropped with a gap from 2nd, and did not recover immediately, we were alerted to some change occurring. When the market continued to slip with gap down opens (again, with no recovery), it signaled something more serious was afoot. Chart 1 shows the path the Nifty took through the week.
It can be noted that the opening gap for the week was never attempted, even though there were three attempts at doing so. In the process, the Nifty fut set up a resistance around 24,400 and the gap zone (24,500-650) is another area of resistance at 24,500-24,650 zone. So, the upside resistances are well marked.
Now, we can also note that the low of Aug. 5 (23,912) has been succeeded by higher bottoms on the subsequent days, despite continued downside pressure on the index. If readers recall, I had highlighted the date of Aug. 5 as an important trend change date for the month. Here is what I had written last week, “I am not getting any major time hits for August. There is a small one looming around Aug. 5, but I reckon the bigger one is coming in first week of September only.”
Based on that time analysis, as well as the higher bottom patterns, I expect the revival to continue and for the resistance highs indicated above to be taken out. The rough rising triangle pattern on the intraday chart will set up a target zone of the 24,900—which will bring us to the next big gap resistance zone.
Now, what if our assumptions of revival are wrong? In that case, more declines should occur. Since the stock is feeling its way around the lows, we can rework our stops to 24,000 levels, the first higher bottom after the Aug. 5 low. Chart 2 shows the set up on the daily charts. Here, I have added the Gann angles from the last minor swing low and the 1×2 angle line points to a slightly lower low. More importantly, if it goes below 23,900 swing low, it will set up a lower top-lower bottom pattern, which would signal a change in the short term trend.
On the weekly charts, this would be the first of the down candles after the formation of the high. Typically, an intermediate correction, if set off, would then last a total of three-five weeks and that would mean a few weeks of correction to occur. We can, therefore, see that the 23,900 low is an important one from the perspective of the immediate trend direction and its duration.
Not helping matters is the fact that the Bank Nifty is already into a confirmed lower top-lower bottom pattern since the last five weeks. A big contributor to the Nifty (the bank sector) is not going to help (unless it turns around immediately). Chart 3 shows the set up on the Bank Nifty.
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A big contributor these days, particularly in the area of sentiments, is the Midcap index. A look at the chart 4 tells us that this one, too, is a bit tentative right now, as it has dropped with a wide gap, but hit the first zone of support. It is churning there and one could say that it is touch and go time for this space too.
Just beneath the current levels is an important support zone (dashed line) that needs to hold for the uptrend to continue further. A break of this levels would spell trouble for the market because the sentiment would get hit.
Right now, sentiments are being governed quite a bit from overseas news feeds. That has induced increased volatility into the market, making day trading pretty tough. But with central bank actions in the US and Japan looking more or less done, we may hope for less shocks to the system. The excess volatility may need another day or two to settle down, which means that the early part of the week may continue the volatile behaviour, especially as Thursday is a holiday. So, I am not looking for any big resolution of the current imbroglio in the coming week and if the market is going to churn, then it would be stock specific moves with index remaining range bound. So, recommending a low level of activity to unfold ahead. Market is still quite willing to reward the good performers (like Garware Hitech Films Ltd., Lupin Ltd. etc.) even as it chooses to punish the poor performers (Jindal Stainless Ltd., Tata Power Co., Adani Enterprises Ltd.).
Another problem with judging market trends based on overseas feeds is that almost no one knows how to analyse it. For e.g., this Bank of Japan 0.25 increase in interest rate created a furore because of something called the unwinding of Yen carry trade. While professionals can run estimates on this, the lay trader will not be able to. So, cannot estimate the extent of move that may emerge out of this news flow. Similarly stuff like Jobless claims, Fed speak etc. etc. So, if the market continues to rely on global cues, then volatility would continue.
At the moment, local factors seem to be limited. The flow of quarterly results have been somewhat mixed with positive vs negative results ratio being around 1.5 to 1.00. Decent, but nothing too hot. An important element is that we have gone through two rounds of risk management (election and budget), have both caused losses to investors (as market rallied to new highs), FII buying has not stepped up much and the SIP-pers continue to support the fund flow. This has now caused a new worry to emerge—what if SIP reduces and/or worse, the SIP chaps start selling? Who will then buy? So, the worry of election and budget has been seen off, but it is getting replaced by continued SIP flow to persist. The net result is continued confusion—local worries mixed up with global news flow!
Now, if you see the threat of trend reversal (in the short term) seen on some index charts from this confused environment, expecting aggressive rise or fall would be out of place.
Thus, stock specific actions may continue. The triggers here will run out in a fortnight or so, by when the quarterly numbers may run out. So, the recommendation for the coming week is to play cautiously, latching on to positional play only where some local news of a large dimension (result blockbusters like Lupin or Garw Hitec etc) where runs for a few sessions shall occur and pullbacks would get bought into. It is still not a sell and buy market, except if 23,900 is lost decisively (in which, a short term move of few days may be seen in stocks with negative news flow). Keep participating but avoid enlarging size until clarity emerges.
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.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team. NDTV Profit is a subsidiary of AMG Media Networks Limited, an Adani Group Company.
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