Nifty In Technical Charts: A Small Reaction Unfolding

Whenever markets have to deal with multiple events, they are always hesitant. In that context, the progress that the market made was creditable. Particularly so when the Monday start was a scary one, with a wide gash at the open. This was in response to the imposition of tariffs from President Trump. Markets across the world chose to respect that, as did we and bears paid attention to that more than the positives thrown up by the budget. Many got spooked by Monday’s weak start but keen watchers of the market got a glimpse of better times from the fact that the impact of the tariff action was digested by our markets swiftly (within the first 30 minutes of the day) and a good revival began from Tuesday. See chart 1 to know how last week's trading panned out.

Whenever markets have to deal with multiple events, they are always hesitant. In that context, the progress that the market made was creditable. Particularly so when the Monday start was a scary one, with a wide gash at the open. This was in response to the imposition of tariffs from President Trump. Markets across the world chose to respect that, as did we and bears paid attention to that more than the positives thrown up by the budget. Many got spooked by Monday’s weak start but keen watchers of the market got a glimpse of better times from the fact that the impact of the tariff action was digested by our markets swiftly (within the first 30 minutes of the day) and a good revival began from Tuesday. See chart 1 to know how last week's trading panned out.

This helped to carry prices higher towards the first of the targets (23,800) and witness some profit-taking into the end of the week. The last week's letter had given the target zone to be around 24,200 and that continues to remain open. So, the pullback going on is in line with expectations.

On Friday, the RBI governor delivered a rate cut of 25 bps—something after a hiatus of more than three years. The market flared a bit but it was soon beaten back—probably because this cut was already factored in. But more likely, it was a statement on the GDP growth (somewhat tepid) that was made by the governor.

The decline led many to consider that the market is neither impressed with the budget nor the RBI policy and hence the pathway should be further downward. But I would wager to state that the fall is in line with the unfolding cycle. After all, the market had moved 1000 points from the low of last week. Since I had given a clear buy signal, people following that advice should have benefitted decently. Now, with the sentiment rattled a tad, a pullback was to be expected.

How far can that go? Well, it should be a Fib retracement. Chart 2 shows the retracement as well as the CPR levels of note for the coming week.

Two zones are shown using the Fib and CPR levels. Alongside, I have also added the two turn dates for February (red dots) and these are on 11th and 18th February. If bias is up, then the correction should halt at the first price support (23,300) and end by the first turn date. Extending beyond would then reach the second set (23200 and 18th). If these don’t happen, then the market is playing out some other way, and I will have to recalculate.

If the support holds and the market turns up, then we have to continue our long positions or create fresh ones. If the price and time nexus breaks, then we should first exit from any recently created long position and then check out present holdings to check if any of those are worth exiting.

Do we spot any sectoral action in the last week? Perhaps in metals. Chart 3 is the CNX Metal index. We can note that the index has made a couple of higher bottoms recently (when all others were making lower lows), creating some relative outperformance with other sector indices. Also, there is some nice room to the topside of the current down channel. And, finally, the higher bottoms on the price chart have created a range shift pattern on the RSI chart.  The top channel is about ~4% above current levels. That ought to be good enough to trade a few names from the sector.

The newsmaker of the week was, of course, the USD/INR, with the INR hitting new all-time lows. Chart 4 is the USD/INR chart compared with the DXY, the dollar index.

What is immediately noticeable in the chart is the extent of non-correlation between the USD/INR and the DXY. The latter has been on a swinging move for the past few years but that has left the USD/INR pair unmoved. It has been on a steadily losing trend and now, with the recent trend of the DXY, the USD/INR has gotten into some good sync with it. What caused that and how it shall pan out, I have no idea. Usually, when two items get into sync, then the strength of one rubs off on the other and vice versa. Over the last 6 months, the dollar has been on a strengthening spree and that has resulted in the INR getting pushed to new lows.

Dollar strength is often defined by the moves in the 10y yields. Chart 5 shows the correlation between the US 10-year yields and the dollar.

The recent decline in the yield chart began on Jan. 13, 25, and pulled back to near the 62% retracement area by last week. Expectedly, support has come through at the expected level. Hence, the dollar should strengthen from here, which would be bad news for the INR and, consequently, for the market too. We do need to keep track of all these elements now as so many dominoes are in play.

The earnings season is nearing its last phase. Nothing very attractive nor anything very weak. So, no major impact of the results this time. All other triggers (budget, rate cut, etc.) are all played out too. Hence, chances are that focus may once again turn to the US markets  and that can make for some continued volatility.

The rally from the January low is yet tentative and hence traders should proceed with caution. The situation is still bullish but there is a possibility of trend continuation. So, we should play a cautious game ahead. The lower levels mentioned earlier on the Nifty should continue to be looked upon as a buying opportunity.