Nifty In Technical Charts: Still In A Consolidation Mood

The monthly candles have shown four successive higher high months but all four (including ongoing April) have been small body affairs, with shadows on either side. This too indicates consolidation largely, albeit with a slight upward bias. But the analysis of charts for different time frames is still showing us that we are not yet out of the consolidation mode in the market.

In the last letter I had mentioned the necessity of the prices needing to cross the 62% retracement of the April fall and it did, reaching just above the 78.6% retracement too. Hence, the index has shown willingness to continue higher and if given the right kind of inputs now, we can see it punch thru to new highs in May. Chart 1 shows the intra week movement and on this chart, I have overlaid the Developing CPR for the next month. It can be noted that the pivot for May is at 22,400 level, which is the 0.618 retracement zone, which now crossed, can act as a support on pullbacks. The BC level of the CPR is at 22,330 which can also function as an immediate support zone to buy into, if desired. Any forceful break below 22,330 may lead to some pullback into fresh demand areas below before another attempt at higher levels can be made.

The din on some macro events appears to have been overcome, it seems. Fed speak continues to keep the rate cut expectations back-ended for now. With more recent macro data in the US not being so conducive and the Dow having slipped a bit, we could expect US markets to remain somewhat subdued for a short while, thereby not producing shocks for opening gaps in our markets. The Nasdaq too has hit down some and is slightly dicey right now. Only Alphabet seems to be flying the bullish flag as of now. So, we may not expect much surprises from there either.

The US 10-year yield is inching higher and may keep the lid on the equity markets there. Brent has been rallying but the charts are quite normal. Hence oil doesn’t hold out as a possible scare and may have only some day-to-day impact next week.

The upshot of all the above US based macro data is that we may find our markets now able to decouple somewhat from the intense pressure from developments in the US and now able to follow local triggers.

These are in the form of Q4 numbers that have commenced in right earnest. Unfortunately, none of them have really lit up the Street yet. Hence the response of the market has been somewhat muted so far. But, good performers have been selectively rewarded while some of the bummers have been pressured too. So, a normal market so far, it would seem. Sentiment needs to go off on one side for new highs to be recorded, so we need inputs for those.

IT majors are all done with their results and have nothing much to show for it. But market may take a different view — that trouble from an expected area (weak results and commentary) are now out of the way and that gives the index a chance to rally as IT pack may see some short covering. FMCG leaders have been blowing hot and cold, so their moves may be stock specific rather than index contributing. Same is the case with private banks with only a couple of them being to carry the day.

In fact, the PSE and other banks continue to appear to be in much better trends but they don’t move the needle for the indices. However, they do buoy up the sentiment and that can be a positive. Same is the case with Metals where too the trend in most names appear to be in safe bull hands. The results in small and mid cap space is yet to flow in full stream and although they may not influence the main indices much, they can contribute much to the sentiment if matters flow well here. So, this is really the area to check in the weeks ahead for tradable opportunities rather than in the large cap area.

In fact, the strong thrust to all time highs in the MidSmall 400 index (see chart 2) shows that the flow of the money has already commenced into this space. Readers are advised to do likewise.

One of the continued dampening factors is the selling by FPIs (Rs 6,300 crore in April so far). Two factors were visible — first, the tweaks in India’s tax treaty with Mauritius, and second, sustained rise in US bond yields. With the 10-year chart showing possibilities of further increase, this selling pressure may continue. Weak cues from the global markets with uncertain macro and interest rate outlook didn't augur well for emerging market equities. Additionally, surge in commodity prices, especially oil and higher US retail inflation dashed hopes of an early rate cut by the US Fed thereby triggering a surge in the US 10-year yield.

The positive factor is that all FPI selling in the equity markets is getting absorbed by DIIs, HNIs and retail investors. This is the only factor that may reign in FPI selling.

In the meantime, two phases of the Lok Sabha elections are done. Low turnout is a cause of concern. People must go out to vote. Anecdotal evidence shows that low turnout is often a signal of the incumbent winning. Markets are pricing a comfortable BJP victory.

For the immediate future, the pitchfork alignment on the intra day (75m) chart ought to work. See chart 3. It can be noted that prices have rallied to the median line. A reaction from here would be normal and should retreat to take support along the lower channel. Two swing lows are marked as stoploss levels 1 and 2. The first one is for very active traders while the second is for normal traders. Investor stops are far away yet.

Chart 4 is Nifty Metal index and even though the trend is strong in here, we can note that the index has been running up for more than five weeks on the trot and hence it may be time for a breather. Hence, it may be advisable to watch for some profit booking opportunity here for the short term so that we can buy back into the sector in the next correction.

Auto stocks are in good trends and given a chance, may continue further. Could be a sector to watch in the week ahead.

Given the mixed nature of the market, it is better to be a bit on the defensive and play it as it comes. Use newsflow from Q4 numbers as a guide to enter fresh positions.