Nifty In Technical Charts: Non- Standard Indicators For A Bottom Here

We were looking for some strong moves and that too to the downside. I thought it may be as high as about a 1000-point move, as there was space in price and time. We did get was a decline but the range was about 420 points. That was on the Nifty. But more importantly, the pain of a 1000-point fall was felt most where it hurts the most! In our portfolios! Compared to the Nifty (down 2.8% for the week) the small cap index fell twice as much (4.18%) in the week!! For January so far, Small cap index is down 9.45% while the Microcap index (another big area of holding of Retail players) fell 9.68%. Among popular sectors, Realty fell a whopping 20.58%.

This is the reason for the sentiment taking such a dive. Going into the next week, I feel the commentary is almost 100% bearish. And why not? For, there are all kind of technical signals- trendline breaks, momentum to the downside, big short positions by FIIs, continued selling by them yet, any long trade in any sector getting smashed down etc. etc. All experts, talking heads from TV and Institutions etc are all espousing bearish views.

Market seldom likes a consensus. Those are the times when it suddenly decides to do something different. Will it do something like that now?

For that to happen, we will have to consider indicators other than what is commonly used and some common sense also applied to the charts. Let’s see if we can find any.

First of these indicators would be a Time forecast. In the first letter of Jan 25, I wrote about the upcoming turn date for January (around 25^th). I also wrote that the whole week would be an important time element starting from 20^th. I had stated back then that we have to wait for a few weeks before we get some possible price and time watch and warned readers not to get into any long positions prematurely as the market had completely lost its tailwind. Even though the market had made a low back on the 13^th (the first of the turn dates for Jan), the bigger one was picked for 25^th and it can be seen on Chart 1 that the trends went more sideways (whilst maintaining a downward bias all thru) until last week.

Market seldom likes a consensus. Those are the times when it suddenly decides to do something different. Will it do something like that now?

For that to happen, we will have to consider indicators other than what is commonly used and some common sense also applied to the charts. Let’s see if we can find any.

More, the moves have all taken resistance at the median line of the Schiff pitchfork drawn on the chart using the latest pivots. So, the bad news continues since several months (from mid Dec letter, soon as the counter trend rally ended) that this letter has been warning readers not to be long.

Even in the last week letter, I had showcased the CPR indicator and how it was helping us to track the trends. Chart 2 is a continuation of the same theme. Prices continued to remain under the Last week CPR and now the chart is updated with the next week CPR as well as the expected next month CPR.

The interesting aspect is that, even if the market stabilises here, it will run immediately into the resistance posed by the monthly CPR! Everyone is waiting for a rally from the current oversold areas. It is probably the reason why aggressive shorts are not coming in. Even though the 23000 levels were attacked, the index is still floating around the same levels. The next week CPR is still poised around 23200 high. It starts running into the monthly CPR from 23400 levels. Hence whatever pace it may pick up, (if), it is going to be tough grind for the trends to move higher.

But we were on the topic of time forecasts. In that context, the inability of the index to fly towards the targets lower (around 22850 area) is a small positive signal from the market. The market, it appears, has chosen to play the time factor out while still holding on to the price area (23200) somehow. If prices now manage to create a reversal pattern of sorts early next week, then a bottom could be getting in place here.

Mention was also made in the last letter about the oversold status shown by the FII Index short positions. It went right into the 3.50 lac short zone during the last week and we find that short covering has emerged from the FIIs over the last two sessions of the week ended. Now, if we see that short covering continue into the next week, then the possibility of a low made will strengthen. Like I stated earlier, we need non-standard indictors to signal a bottom here. So, I am using the time forecast date as well as the FII oversold positions for judging trend action.

In both these cases, the wrong point is very nearby. If the low of last week is broken or the FII position low of 3.50 Lac contracts is broken, then the bottoming scenario will be invalidated. You can see the data in the updated chart shown in Chart 3.

Of course, in the last week, no reversal pattern formed so no buy could be taken at this juncture. It is still a process in the making. Hence the question of a stoploss emerges only in the coming weeks.

There are plenty of price resistances that have already been mentioned and they need to be all crossed to show signs of returning strength. First up would be the 23200-300 area. Remaining above it would be a trigger for the aggressive trader to go long with a stop below 23000. As I wrote in the earlier week letter, “What we need to watch for, then, would be for a move in the NF beyond 23500 and for the Bank Nifty to get past 49500, or better still, 50000. Now, if some decent number of good results get thrown in, then the chances of continuation will be even stronger and the move shall become sustainable.” As of now, that seems like a tall order. But that is what is needed for continuation higher.

Help may be coming from an unexpected area! Chart 4 is the Dollar Index. Here we see a clear decline with trendline break and momentum divergence. This is a reversal signal on the Dollar.

In a letter two weeks ago where I had analysed this chart, I had stated that a pullback to 106.5-107 may be possible. Once that levels also breaks, then the DXY would signal a failed breakout signal that can pull it all the way down to 104-105 levels. This can be a good development for the Nifty, as it can fuel a better rally. In that same letter I had also spoken of Crude hitting some important resistance near 80 and now it seems like that resistance is holding and if Crude also starts sliding (it is already at 74.60), then that could add some further fuel to any rally expectations for the Nifty.

Now see the prevailing other macro events this way. The global markets (including India) have taken in their stride several wars that are on right now; our markets have seen out several elections while the world is about to see off Trump win and swearing in last week and more such stuff. While US big firms have fared well the Indian counter parts have not and we have now got used to that aspect too. This has led to low expectations for the current quarter and even possibly the next one too! Expectations from the budget too are low, because the economy has not been faring too well. Mid and Small cap stocks have been getting smashed and while there may still be room for valuations to correct there, a good chunk of the froth is let off too. FII selling is now being taken for granted as long as US 10y yields hold at 4.5% and above. Even as large cap valuations have reached more sensible levels, the fact that the FII will continue to dump them is preventing people from going long there.

The upshot of all the above is – a lot of the negatives have all been factored into the market!

So, what can take the market even lower? Currently it is more fear that it may collapse than any real reason?

In that context, if the Dollar cracks and alongside Crude falls and then some results surprise appear and finally the Budget also holds out some carrots, what can happen to the trends then??

All this might be wishful thinking but hey, as an analyst, that is my job! Present you all with a facet that may not be the current preferred thinking! I wrote at the start that we need to think of non-standard thinking to spot changes. Well, I gave you some differential data and a different way of looking at the present environment!

Anyway, reality has to temper all our thoughts. While a rally is our desire, there is much that the market needs to before and those levels have all been outlined above. Let that happen and ONLY then think of rallies. The caveat we carry at all times is that if the lows of last week are broken then declines will be renewed.