Nifty In Technical Charts: Waiting For The Big Trigger

It is not that good news did not flow. They did. From several fronts. The inflation eased and the IIP numbers improved. Now that should be a good enough for a good rally or a boost to an existing one. But somehow, market remained unimpressed. The OMO and the Dollar swap activities also went through smoothly. The data on inflow into MFs was also quite decent. But still, the market hesitated. Chart 1 is the progress through the week.

It is not that good news did not flow. They did. From several fronts. The inflation eased and the IIP numbers improved. Now that should be a good enough for a good rally or a boost to an existing one. But somehow, market remained unimpressed. The OMO and the Dollar swap activities also went through smoothly. The data on inflow into MFs was also quite decent. But still, the market hesitated. Chart 1 is the progress through the week.

The week actually pulled out a corrective to what seems like a five-wave advance from the 22,101 low. The move towards the end could be extending the correction into a triangle d and e waves or could be commencement of a new upward leg with legs 1 and 2. This is a bullish Elliot wave count and for this to remain patent, ideally, we should see the market start off well next week and continue to remain better. If that doesn’t happen, then the five-wave structure itself will be a question mark and we would have to shift to a continued complex corrective wave down (in progress for the past few months) and the recent low may come in for a retest.

Typically, I don’t like to continue with a preferred count if the labelled C wave is broken. That makes last week low of 22,350 or so as the trailing stop on a bullish count. In Elliot, I don’t like complex corrective waves either as it reduces the probabilities of successful trading, leaving too many questions unanswered. So, my simple rule of the thumb is to abandon counts if a presumed wave 5 or a wave C is exceeded. I then conclude that a complex is emerging.

The main reason I mention about EW this week is that if the expected higher leg opens upward, then I would not hesitate to take some fresh longs swiftly. Even though some longs were created with the call for a low, the lack of upward strength also dictated that one had to mix up the trades with some shorts too, as the train had not been waved away. So, we do need to have some idea if stops are to be quickly applied on pending shorts.

In the next chart (Daily NF with Sup marked), we can note that every dip in the current fall from Sept the prices retrace to some consolidation from the past. See the arrows pointing back to the consolidation or hesitation area from the past. So, now, if the market gets some sort of fresh assault, then the chances are that the lows near 22,000 may break. This can then open up room towards 21,200 areas (see red arrow pointing out).

This becomes the scenario for those that are bearish. There is some consensus target figure of 21,800 also going around in the market and that may have a few takers to create a halt there before progressing further. Just one point for those who value 21,800. When the index hit close to 22K, this bandied about targets was a mere 200 points. Now, what is 200 points in the context of 22,000? Meaningless, really.

Chart 3 is for some perspective on corrections. The previous big one was back in Oct 21 through Jun 22, a period of 34 weeks and for a decline of around 18%. The current one has so far run 22 weeks only for a loss of about 16.25%.

WD Gann says that a trend changes when there is an overbalance in price and time. This time around, price lost is more (4300pts compared to 3300pts) but the time taken is lesser (22 vs 34 weeks). This tells us that what we are seeing is, as yet, a sharp correction in a rising market. If this now persists and the time element exceeds more than 12 weeks from here, then we would have to question the continuation of the uptrend. For now, that seems quite unlikely. And one of the main reasons for stating so is that the sentiment had moved to such a nadir by last week, that it rivalled many of the former bottoms. Despite all arguments in favor of a bottoming, there is just no willingness to come forward to buy.

One of the reasons could be that the ‘active’ trader-investor is the one who is badly injured in this market and lacks funds to buy in despite knowing that this could be a good point to buy. But there is plenty of money in the wings, as evidenced by the fact that the flow towards the MFs is not diminishing by much. It is the spirit that is lacking. YouTube is still full of videos warning of dire new lows!

Seems like people need some more convincing. Chart 4 is a ratio chart between largecaps and small, mid caps, using the ratio of Cnx100 (large caps) and Cnx500( the whole large, mid and small caps).

It is noted that post 2020, the market has largely been dominated by a shift of attention to the mid and small caps and their outperformance lasted right into the recent low! Now note the sharp uptick of the line (implying largecaps are coming back in demand) and that rally has neared the multi year resistance trendline. A push past this will lead to continuation in demand of the largecaps.

Why is this important? Because the Nifty and Sensex are made up of largecaps and if they improve, so shall the indices and so will the sentiment. Looking at value and the price action, perhaps it may trigger FIIs to return. Already, FIIs were seen to have turned buyers in Brazil market at the end of the week. Can India be next?

Chart 5 is weekly chart of Bovespa, the Brazilian index. The jump of last couple of weeks is off the long term support trendline coming from the 2020 lows. Now, the prices have broken out higher above the intermediate resistance trendline as well.

With the govt doing its bit (good budget, policies) and RBI doing its bit (infusing liquidity, rate cuts), economy doing its bit (lower inflation, better IIP and PMI), the market may be looking for the corporate sector to do its bit now. However, this will be known only around mid May when the Q4 results start flowing. That leaves investors and traders to do their bit. The FIIs are staying away and continuing to sell. They may ease, it seems, as the US equities peeled back a bit, the bond yield got pressured some and the Dollar index yielded ground. So, if they now start looking out, once again, for finding gains outside, money may start moving out of the US again.

I think this is an important trigger (FPI selling to ease and them turning buyers) that the market may be waiting for. Are we going to get it? As ever, we look at data connected with such events to try and forecast some answers. If we get it, we can look at some sector and stock charts to spot opportunities that may sustain enough for us to make some profits. Until then, however, it is all touch and go.