Nifty In Technical Charts: Need To Accept New Realities

But we reached an important juncture in the last week. The earnings season began and that will continue for about a month. This time around, though, part of it will run into the budget and therefore, the expectations and fears around that event will get mixed into the equation. The news from the US continues to roil markets there and has impacts here too. Trump moving into office is going to possibly create some anticipation of heavy winds and no one quite knows the impact of that. China is taking up defensive positions against anticipated actions by Trump and those can set off some unexpected tremors.

We can go on with the list, but you get the idea. If you thought the market was tough to deal with till now, then maybe you haven’t seen it all yet!

Here is the story in charts. Chart 1 (Bank Nifty daily) shows the status of the current trend.

The week that ended was a washout for all the bulls. The market declined in all five sessions, with Friday being particularly severe. We have all been relying on the lows of Nov end as a good support zone but in the case of the Bank Nifty, that cracked decisively while the Nifty is within hailing distance of it. Any attempt at bottom fishing anything across the board backfired big time on buyers. The market, being already at oversold zones before the start of the week, could not attract active shorts from traders and hence long unwinding in a largely buyer-less market led to the extension of the declines. By the end of the week, the market became even more oversold and therefore the same problem will persist in the coming week as well.

But we reached an important juncture in the last week. The earnings season began and that will continue for about a month. This time around, though, part of it will run into the budget and therefore, the expectations and fears around that event will get mixed into the equation. The news from the US continues to roil markets there and has impacts here too. Trump moving into office is going to possibly create some anticipation of heavy winds and no one quite knows the impact of that. China is taking up defensive positions against anticipated actions by Trump and those can set off some unexpected tremors.

We can go on with the list, but you get the idea. If you thought the market was tough to deal with till now, then maybe you haven’t seen it all yet!

Here is the story in charts. Chart 1 (Bank Nifty daily) shows the status of the current trend.

I am using the BNF this time to highlight the weakness. The Nifty is not too far behind. A nice consolidation zone was broken decisively and a new swing low was reached. The RSI hit down to lower levels, indicating that the fall is with momentum. In earlier letters I had mentioned the possibility of a range shift pattern developing but last week’s decline put paid to those hopes.

Undoubtedly, prices have reached an oversold zone and possibly a rally is due. Momentum indicators have hit oversold zones, PCR readings are at deep fathoms (especially for BankNifty), sentiment has hit the pits, etc. So, there is a natural expectation of an oversold rally emerging. But what is more important is whether that rally can sustain long enough to pull the sentiment out of its morass. Chart 2 shows the four top-weighted sector indices on the Nifty to see if it can be pushed up again.

Banks are the top-weighted items. We have already seen that they are on a skid. News flow on PSU banks front walloped those stocks recently. With HDFC Bank down with a failed breakout, a lone ICICI Bank may find it difficult to do any wonders. Only the IT sector, the second heavyweight on the Nifty, is holding its head up as of now. But TCS came out with inline results last week. Now it will be up to the other leaders (HCL, Infosys, etc.) to carry the ball for the sector. If they do, the IT space can still shore up the Nifty some. FMCG is the third biggie and that seems to be clearly down and out and upside action may be tough. Besides, when it comes to valuations, the FMCG stocks at 55 are already much higher PE compared to the Nifty PE near 21. So, chances of them driving the Nifty higher are remote. A couple of them may flare up if good numbers but beyond that it is tough. Fourth is Auto and there too, the picture is not really encouraging as we are seeing a consolidation following a decline. This is, usually, followed by more declines. Unless some big news flow or event occurs. So, one may need to watch monthly auto sales, etc., ahead for hints at improvements.

Now, if the top four sectors are not going to be supportive, then where can the Nifty get a leg up higher? One of the elements that can provide the trigger is the budget. It can do it for any sector, for that matter. So, this time’s budget is going to be a kind of decider compared to more recent ones. In the last four years, for example, the budget had to just play the role of not spoiling the strong uptrend. But this time, we need it to play the role of a trend changer!

But a more important element too has to be addressed. Chart 3 is the Nifty Momentum index and this has, largely, small and midcap names of decent quality. The plot is almost identical to that of the Smallcap or Midcap index so it is probably a better representative of the action happening in that space.

The first thing that stands out is the fact that this index hit a new all-time high in mid-December 2024. Clearly, this is a macro-level divergence pattern, meaning the mid- and small-cap segments are not topping with the main Nifty or Bank Nifty (which both topped out on Sept. 24). History indicates that whenever such a divergence occurs, then the small and midcap space tends to underperform for the next many months. This is an important distinction that we should all be aware of. The most recent occurrence of this phenomenon was back in 2018 and after that we can recall that the small and midcap space could not get up until 2021. Chart 3 shows that a major support level is about to break and if it does, then the pain is going to increase for portfolio holders of such stocks.

People are confounded by some other facts too. One of them is why are the FIIs selling so much? The answer, among other elements, is to be found in the weakness in the rupee. Chart 4 is the USD/INR.

We can note here that the rupee has been weakening steadily through the past years. It took on a bit of acceleration after Trump's election that led to a spike in US 10y yields and dollar strengthening. The RBI has been busy controlling the growing weakness of the INR; else that chart might have looked worse. But a depreciating currency takes away the returns of FII investments and when the yields in their own shores are equal to or bettering the yields they may be getting from investing overseas, the reason for withdrawal becomes clear.

Chart 5 is the Dollar Index DXY. For about three years, the dollar held steady, lulling many into taking its steadiness for granted. But towards stability on Nov. 24, the trends changed in the DXY, and now the moves are picking up fresh upward momentum (shown in the RSI chart section) and that implies further gains in the DXY, leading perhaps to a challenge of the previous high around 113 levels. This could lead to a 20% strengthening of the dollar against other global currencies. While the impact on different currencies could vary, the very possibility that there could be continued depreciation in coming months is enough to make everyone nervous. China, Europe, Japan, etc., will have their own dominoes play out during this move but India cannot be left out in the depreciation. A weak rupee will continue to keep the FII away or selling.

There are many other factors we can talk about, but by now you have some idea of the complexities that go into determining prices.

Note that these are factors we can create correlations to. What then about factors we don’t know?? This is the reason it is best to follow the price actions in the variables we follow. Until we see evidence to the contrary, it is best to assume that the price action indicates what lies ahead. This is the triumph of technical analysis. It is the desire of the rational side of the mind to seek out correlations. But the price action’s verdict should be considered the final word. If we can keep the rational side of our mind out of the way, then no one shall have any difficulties in accepting the verdict of the markets. Right now, as I tweeted in the last week, the only people having trouble with the market are those who are having difficulty with accepting what the market has been saying about its trend!

So, while we have engaged in a more intellectual discussion regarding factors surrounding the market trends, the fact is that the trends are down and the best that we may get ahead is an oversold rally. Those are not the moves that make big money but may be only good enough to pay a few bills. Plus, the area that we in the retail segment are busy with (the small and midcap space) is not exactly looking very cheery and that may be a dampening factor because our sense of well-being is quite a bit influenced by the growing or dipping values of our portfolios.

The results season and the budget may hold out some hopes of redemption but for that to manifest we may have to wait a few weeks minimum. So, it is time to accept that a market with a different character is now in place since October 2024 onwards and we need to learn to deal with its realities rather than remain tied to the past four-year bull phase. 

Our best hope is that the earnings season springs a surprise on us and saves the midcap area from breaking down just now and for the budget to give us some dollops or doles that will repair the sentiment. But hope is seldom a good strategy, as all know. It is time to face up to some new realities in the market after a few years of good times. Let's all gird up for it.