Nifty In Technical Charts: Pulverised Trends

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

They absolutely could not. So right on Monday itself when the week began, we knew that the market had no intention to show any follow through action on the big volatility of Dec. 13. When the day finished lower, albeit with a small range, it still held out for a possibility of some revival for Tuesday.  If readers recall 13/16 was billed as the turn point in time for the month. Since big reversal on last Friday the 13 could not produce a breakout and the trading of Dec. 16 could not continue, the stage was set for some declines. The price and time window was explained in the earlier letter.

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

It would have, if the prices had moved higher. Since they didn’t, they just dissolved further into weakness as the week saw declines.

Does the breadth conditions improve as prices move higher?

This question was relevant only if prices moved higher. However, as prices slipped, the breadth aspect turned worse as more and more stocks joined the declining side.

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

The whole week’s trading was punctuated by increase in the short positions of Calls- signalling more bearish intent. The steady drop of the sold strikes lower confirmed- all thru the week- that there was no fear of a short squeeze and indeed it was the put sellers who had to bail out. In fact, looking at the derivative data, it was evident every day that the Retail trade was increasing their long futures and calls and also the short puts while the FII and Prop traders were doing the exact opposite! Clearly, retail was on the wrong side of the trade this time and they paid the price for it right into Friday as prices kept plummeting.

Everyone hoped that some squeeze would happen on either Thursday or Friday at the weekly expiries but those hopes were belied totally.

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

They absolutely could not. So right on Monday itself when the week began, we knew that the market had no intention to show any follow through action on the big volatility of Dec. 13. When the day finished lower, albeit with a small range, it still held out for a possibility of some revival for Tuesday.  If readers recall 13/16 was billed as the turn point in time for the month. Since big reversal on last Friday the 13 could not produce a breakout and the trading of Dec. 16 could not continue, the stage was set for some declines. The price and time window was explained in the earlier letter.

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

It would have, if the prices had moved higher. Since they didn’t, they just dissolved further into weakness as the week saw declines.

Does the breadth conditions improve as prices move higher?

This question was relevant only if prices moved higher. However, as prices slipped, the breadth aspect turned worse as more and more stocks joined the declining side.

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

The whole week’s trading was punctuated by increase in the short positions of Calls- signalling more bearish intent. The steady drop of the sold strikes lower confirmed- all thru the week- that there was no fear of a short squeeze and indeed it was the put sellers who had to bail out. In fact, looking at the derivative data, it was evident every day that the Retail trade was increasing their long futures and calls and also the short puts while the FII and Prop traders were doing the exact opposite! Clearly, retail was on the wrong side of the trade this time and they paid the price for it right into Friday as prices kept plummeting.

Everyone hoped that some squeeze would happen on either Thursday or Friday at the weekly expiries but those hopes were belied totally.

Does market respond to positive news or negative news?

It did not- not that there was much of it though. In fact, the rate cut by the US (ideally, good news) was treated with a huge down gap. So, the market took that piece of news and turned it into one giant bearish news even though it wasn’t really such a big deal.

By then the market had reached some oversold zone with low Put-Call Ratio but the sellers remained undeterred and took further advantage of people’s unwillingness to sell by adding to professional shorts. In addition, lack of rallies from the gap down area prevented any buyers to step in, thus creating a bit of a shallow market where even some small selling had large impacts.

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

FIIs had been covering their shorts briskly in the week earlier and were expected to continue. But they turned around right from the start of the week and went on a selling spree through the week, increasing their short Index futures as well as selling in equity. The rally in the small cap index to almost new highs implied that retail trade had been busy buying the market but by the end of the week they too waved the white flag!

Chart 1 shows the consistent 5-day decline of the week and two trendlines and a CPR (monthly) is visible on the chart. The market will have its work cut out for it in crossing the first of the trendline as well climb above the monthly CPR. That is still around 24100 area in the futures. So, no thinking bullish until then.

There is a second trendline just above too (around 24,200) and that is the second immediate resistance to cross. You also can notice the volume capitulation at the end of Friday and perhaps this may a sign that there may not be enough longs to jettison in the next week?

Now that the Fed has spelt out its stance, the Bond yields in the US are likely to hold firm and the Dollar will also remain firm. Already, the UsdInr has hit an all-time low during the week and typically, weak INR leads to weaker trends as FIIs may continue to sell. With no specific news flow expected locally, we shall remain sensitive to news and events in the US and that may create some opening gaps etc. Not a good scenario to close the week with.

Chart 2 is the DXY index, showing some strength in the last week, reaching a new recent swing high at 108. It may be a range breakout of many months, heralding some more advances ahead. This can be expected to keep the INR sliding slowly.

Additionally, the Chinese Yuan may also be under pressure to devalue in anticipation of sanctions/tariffs from the US. The same chart shows the Dollar-Yuan chart that too is showing a bullish set up for the greenback against the Yuan. In this inset chart, we have what looks like a rounding pattern followed by a rising triangle under formation. Both patterns point to a possible target close to 7.90 for the pair- a very weak scenario for global currencies vs the Dollar.

So, the background setting is still none too encouraging. Let's check out the index charts to find some levels of support and resistance. The whole of the last week was a decline. Generally, we find trends moving successively for 5-7 sessions. This means there may be a couple of sessions more before we get to a logical turn point.

The immediate next change in trend could be around Dec. 26. If by that time, the prices fall further, the next support to expect would be at the 61.8% retracement at 23,200 area. So, in the coming week, we now have a price-time confluence to focus on.

Chart 3 is a momentum indicator — a Multi RSI indicator that I have created. The arrow highlights the formation of the divergence signal. But the rally that emerged from the earlier bottom could not gather much strength as is indicated by the dispersion of the RSI line across different time frames (this indicator is decisive when the multiple time frame RSI lines coalesce and becomes a thick blue line). When the Rsi lines are dispersed, it speaks of low momentum force. That is the situation right now.

I am going to leave it at that. When trends are tenuous for this long and then taken a downward path but have reached oversold zones, but continue to show a lack of strength, then it is better to wait for some culmination signals to emerge.

In the last few letters I have suggested to readers that they should create buy trades only after ascertaining the trend strength- and this has never emerged. In the market, consistent absence of bullish strength is to be interpreted as weakness. But the problem here- despite the continuation of the fall in Dec- has been that the down move too has not been too convincing a move that one could take up positions confidently. Hence it is possible that many would have missed this portion of the downward leg. With indicators lacking conviction yet, the choice of shorting trades is still a tough one to make. Hence it would be a market where one can stay on the sidelines until good signals for buys appear. If they don’t, then a sell on rally approach can continue. But the real point is, how many among us can really sell rallies? If you are one, then by all means participate. But if that is difficult, then best to be on the sidelines for a while