Nifty In Technical Charts: Much Needed Rally

On Monday last, the low was made right into the first session—and that happened with a big wide gap, raising nightmares of more declines. But as soon as the market kind of righted itself within the next few minutes, it became apparent that we were not going to give in to all that bearish talk. Time and again, it is seen that when a wide gap doesn’t show a follow-through price action, it is a good bet that the market’s direction can turn the other way. This is what prompted me to issue a tweet in mid-session of the same day, calling for a bottom at 22,101. I also mentioned therein that I had taken up some tentative new longs. Chart 1 shows the elements.

On Monday last, the low was made right into the first session—and that happened with a big wide gap, raising nightmares of more declines. But as soon as the market kind of righted itself within the next few minutes, it became apparent that we were not going to give in to all that bearish talk. Time and again, it is seen that when a wide gap doesn’t show a follow-through price action, it is a good bet that the market’s direction can turn the other way. This is what prompted me to issue a tweet in mid-session of the same day, calling for a bottom at 22,101. I also mentioned therein that I had taken up some tentative new longs. Chart 1 shows the elements.

This is the other thing. Forecasting is a skill that can be learnt. The real deal lies in converting it into a trade. Because money is made from the trade and not the forecast. Of course, many analysts also get paid to make forecasts. But they can make additional money from taking action on the forecasts!

Well, we have had three sessions of higher highs since that day. Now, why is that important? Because, for a month, from Feb. 5, the Nifty did not show a single day of a higher close until it hit the bottom on March 4! So, three higher highs certainly qualify as a chance of the minor swing, at the very least. Now, when it powers markets higher to log its best week in three months, it certainly does feel good to have caught the turn!

What is further interesting is that all the 13 main sectoral indices finished in the green for the week! This can be seen in chart 2. This would certainly have come as a huge relief to market players as they got relief after some relentless battering over the past many weeks! The whole thing would be a mixture of short covering and long creation as well as fresh buying in several popular stocks.

This rally was certainly needed to repair sentiments somewhat, as the pain of leveraged position unwinding had gotten to a point where even seasoned players were tiring, and a bit more of it would probably have seen them throwing in the towel.

It is in this context that I had also made a video (see Charts and Beyond Ep 11 on YouTube) where I had stated specifically that it is not a time to throw in the towel and that, if one held good stocks, there would be a rally and better prices ahead that we can all get.

The jury is out on that yet, as we can note that market-favourite sectors like IT, finance, banks, realty, etc., did finish in the green but did so very marginally only. The week really belonged to the metal sector, where solid 8.6% gains were punched out, and most of the names participated and made good gains.

Chart 3 is an update of the short-term picture.

The green trendline is the resistance line shown in last week’s letter where I had stated that its crossing is the action to look for. We can note the decisive crossing of the line. The moves have also allowed me to draw a fresh pitchfork, and I note that the lows were all made along the median line. Now, the prices are going for a challenge on the top channel. If that were to occur, then it would be a change in the short-term trend. We first had a turn of the swing, as mentioned above, and now we can get a turn of the trend too. So, that is the signal to track next week.

The chart also has two indicators, the ADX and the RSI. The ADX line showed the classic oversold turn, and this was followed by a crossing of the DI lines. But the data is still not large enough to put the stamp of a new trend establishment as yet, and therefore we continue to label the last week's attempt as being tentative. The RSI, on the other hand, shows the minimum required show of strength as it hauled itself up above the overbought levels by the end of the week.

What we need is for these two indicators to build on their signals in the coming week so that we can think of playing a larger or longer cycle and seek even larger profits.

It is needed because the next higher time frame chart is not too solid yet. Chart 4 is Nifty daily with the same indicators.

The stretched price action was evidenced by the break of even the 78.6% Fib retracement level. But the quick finish above it may save the day yet. We have a gap on the charts till 22,780, and that is the minimum level to regain. We all are aware of how the Nifty spent several days churning near the 22,800 levels before breaking it and hence is an important resistance zone from the recent past.

But the more important element is the two indicators. They are yet far away from flashing any reversal signals, and what this means is that the prices will have to do a LOT more in the coming weeks for the strong bearishness to be reversed. This would mean that it will take some time before we can all start breathing easier again. So, one should not get into any sort of hurry to either go actively long in trades or invest heavily into stocks.

The only way for sentiment to repair swiftly would be for very strong moves to occur quickly, but given the current set of surrounding circumstances, that seems like an impossibility. Hence, the repair would occur progressively. This would mean some frequent to-and-fro movements—felt and labelled by us all as volatility. Also, this would keep the scepticism on, and hence the sell-the-rally argument would clash strongly with the buy-the-dip chaps. Expect to see both these arguments being applied in the weeks ahead. Hence, it is not going to be an easy rally to trade.

In the last letter, I had mentioned that the turning dates were in the last week. But with the kind of pattern and momentum readings that we do have and the chances of some volatility or consolidation ahead, it seems to me that the market may churn some more until the next turn date of the month, poised around the March 20-21. There is yet another one around March 27 too. Trends may remain a bit unclear until then, as firm moves may not really manifest. Again, this would make participating in the market a difficult affair.

But so long as 22,000 levels are not lost decisively, it can be assumed that the correction is about done. But if that is smashed owing to some news flow, then the bullish bets are off. So, the firm stop for longs for now is 22,000 levels on the Nifty futures. Bank Nifty is following rather than leading on the higher side, although it is tending to lag on the downside. That movement is curious, and we may need to be a bit careful among the banks as well.

If index trading is going to be mixed, then stocks and sectors shall respond to news and more localised triggers of flows. Active traders may choose this approach to participate.

The pain seems to be ending but has still not signalled that it has. Play with caution.