Nifty In Technical Charts: Awaiting A Resolution Here

Two things happened on Friday. The near-term support at 24,470 broke and prices fell to the level of the second support at 24,200. Second, the market rallied very strongly off the second support level, nearly making it to the top of the recent swing high. A few would have been able to get that upmove and would be already of the opinion that the market is still in a 'buy the dip' situation. But technically, the move is yet to cross the major levels yet.

The signs of weakness that were being indicated in last week letter came through but the rally of Friday puts us back into the same territory as the week before. Price wise, therefore, most of what was stated in the last letter continues to remain valid. Chart 1 shows the current Daily and Weekly picture using Heiken Ashi stye.

Two things happened on Friday. The near-term support at 24,470 broke and prices fell to the level of the second support at 24,200. Second, the market rallied very strongly off the second support level, nearly making it to the top of the recent swing high. A few would have been able to get that upmove and would be already of the opinion that the market is still in a 'buy the dip' situation. But technically, the move is yet to cross the major levels yet.

The signs of weakness that were being indicated in last week letter came through but the rally of Friday puts us back into the same territory as the week before. Price wise, therefore, most of what was stated in the last letter continues to remain valid. Chart 1 shows the current Daily and Weekly picture using Heiken Ashi stye.

The Weekly chart candles show that the trend that emerged from November low is still intact and based on this style of charting, it will take two more weeks for weakness to appear and take hold. However, the Daily chart shows high degree of uncertainty that may be giving way to declines. The upshot of the two charts is that we need to be careful about a change even as we stay upbeat on the short- term uptrend of the last 3 weeks.

The picture is very similar for the Bank Nifty too. In last week’s letter I had raised a question whether the breakout attempt would succeed. It would appear that it is still struggling to do so. The lone batsman for the sector HDFC Bank carried its bat through the week’s inning but still hasn’t been able to inspire the other counterparts to turn aggressive. Therefore, it leaves the BNF hanging yet at the threshold of continuation higher. Matters may be 'touch and go' for this index based on the Arcs and Angle chart shown in Chart 2. This is a specialised Gann style chart that tracks price and time movements together.

In the chart, the prices have risen to the level of fourth double arc for resistance and the immediate resistance that is visible ahead is end Dec-early Jan (31Dec-2 Jan). Usually, big tops are not made at the fourth arc and hence we may see only a pullback. But it is noted that there is sufficient room to the downside and that may create some uncomfortable price damage. So, need to be alert enough to set a stop on pending longs if any. That, for traders, could be 52,000 levels. But if the rise were to continue there is a decent amount of room to the upper side too.

The situation is somewhat similar for the Nifty as well. Using another method of calculating long term price and time targets, the picture is presented in chart 3.

The vertical lines are Time forecasts while the sloped trendlines are special price-time trendlines. It can be noted that the Sep 24 top was almost a perfect 'price and time' hit and hence it will produce some good reaction- and it did. The declines (as can be seen in the past as well) do take supports at the rising trendlines. This time too the Nov 24 decline dropped down into a support line and has rallied. In the process, prices have now moved past a resistance and there is room to the next line if breakouts are successful.

Thus, the Nifty future is at a situation where continuation above Friday highs into the coming week shall create a continuation of the thrust to as high as 25,400-500 areas. Based on these lines, the support level ought to be 25,460 levels and that is where existing longs should have a stop too.

Therefore, we have the indices perched at a delicate level- with possibilities of either side move. Curiously, not much of an effort is required to achieve a breakout on either side and hence we need to be very watchful of the progress early next week. It is possible that the upward move restoration is also being attempted here.

Derivative data however, is not too supportive in analysis at the moment. There is plenty of call shorts yet but PCR is near 1 and therefore I reckon most of these have been made on Friday and hence there is an anticipation that the coming week may not show any forceful moves and option traders are largely betting for ranged moves. FII positions continue to remain net short although some long additions occurred on Friday. They have added both calls and puts and that speaks for a watchful state.

I have been saying that we are at a turning point in the trends and suggesting that we watch various parameters for getting a clue. At times of turn, every variable weighs in and it is difficult to know which one will tip the scale. We continue to remain at a turn point for the third week and hence the close watch on variables has to continue to be maintained. A couple of letters ago, I had stated that penetration of any parameter is not sufficient if it is just poked. Being able to sustain beyond the specified level is not sufficient- the prices must sustain after a breakout or breakdown. For example, Friday saw the Nifty break below the 24,450 level but by the close, the index was back again comfortably above the specified level. So, Friday was the classic whipsaw move that is bane of breakout situations. No ready solution around these whipsaws.

The items to watch for the coming week would then be:

· Whether the indices are able to move above Friday highs during the trading of the coming week?

· Do the hesitant momentum changes get solidified towards the bullish side if movement goes higher?

· Do the breadth conditions improve as prices move higher?

· Do we get fresh short covering of sold options and if so, which side?

· Does market respond to positive news or negative news?

· What is the situation w.r.t. FII flows? etc.

Based on how the market chooses to answer these and other questions that we may put to it, one can decide on the type of market that shall unfold and how we can respond to it.