Nifty In Technical Charts: Trend Resets — Yes Or No?

On the chart it looks like we had a gap down and we recovered from it. But behind these numbers was a roller coaster of emotions! This chart, therefore, is an excellent example of how we should all stay a bit distanced from the screen. When our noses are too close to it, we feel only the emotion and are therefore not able to see the real picture. See chart 1.

On the chart it looks like we had a gap down and we recovered from it. But behind these numbers was a roller coaster of emotions! This chart, therefore, is an excellent example of how we should all stay a bit distanced from the screen. When our noses are too close to it, we feel only the emotion and are therefore not able to see the real picture. See chart 1.

As usual, it is the 30-min chart of the Nifty starting Monday. All the tamasha began from last Friday evening with the imposition of tariffs by US President Donald Trump. Across the world, the markets had tumbled but the wide gap of Monday was reserved for the retaliatory action by China. Obviously, then, the market considered that action to be a lot more damaging, owing to the fact that it signalled the onset of a possible declaration of a full out trade war.

Lets say we look at this chart a few years from today. All we will see is a gap that had little follow through! That it was possibly an epochal event unfolding for the world will not be captured. This is how a chart keeps things unemotional. When that gap happened on Monday, almost all of us were in some form of tizzy or panic. It was like Armageddon was upon us. The US was to slip into a recession, the world order was to collapse, global trade is gone for a toss etc. etc.

Maybe all that is going to happen. But see what did happen. Monday was the low. And then across the next few days, the market came up and filled that gap. So where does that leave us? Exactly at the spot where we were last Friday!

And what was the status back then? Well, the last week's piece was titled ‘Short term trends unclear’. It is almost like we never moved from that spot of last week! Hence that conclusion should continue to apply?  Just that this week would be part 2, then? Sometimes, life throws us such curious curve balls!

Now, everyone has their views about what is going on, what it means for India and the world at large and I don’t wish to add my voice to the chorus. When we are dealing with a mercurial personality doing world altering things, it goes way above my paygrade. Best thing for me to do is to follow what the prices are telling us – which, like I said earlier, are unemotionally represented on the chart (despite being a representation of the collective sum of everyone’s emotions!).

There, I have the following observations:

• Prices recovered to close the gap. That was not really expected when the Monday mayhem happened.

• Prices reached the 23,000 level which I had thought would be a tough ask at the end of last week.

But in and through all that noise of the week, the expected resistance held the rally, signalling that whatever may be the event, markets will move through a series of supports and resistances. This is the basis of technical analysis and it is the best guide we can have when everything seems to be chaotic around us.

Now, we have two CPRs ahead of us – the weekly (which appears to be crossed already on Friday) and the monthly. I have marked the price levels of the bottom channel of the weekly (22,439) and the mid pivot of the monthly (23,183) and these levels can be used as guidelines for the coming week. It is not a large range, so if the market intends to trend, we shall know soon. If it meanders around this range, then we will also know that it has no intention to trend either. It is important to know this difference because it dictates how we should approach our trades and investments. The two vertical lines are the next expected time turning dates (15/22 April).

This issue I am writing about the value of technical analysis and how it is getting embellished in a week like what we just had. People think it is just about finding some levels. Even something as simple as that has a lot of value – for, you have only broad pontifications coming from talking heads on the TV. What is a small investor or trader supposed to do? Does he buy if he has cash? Does he bail out on this rally if things are going to go for a toss across the world? In trading, is it a buy-dip or sell-rally market? See, there are always too many such questions at such junctures.

At the very least, the CPR levels give a trader an idea of the possibilities that lie ahead. Break the support decisively, then this shifts to a sell-rally market with the possibility of a retest of the Monday lows. Break that also and bigger considerations of higher time frame charts take over. But if you breakout higher, then mapping of higher resistance comes into the equation. And it becomes a buy-dip market. Then to check whether new breakouts are happening or not. Based on that, we take it again to higher time frame chart to check the possibilities. Prices have only one dharma, really, that is to move from one support into the next resistance. Back and forth. Into the forever future.  

This means you have definite pointers about what to do. And that is the critical thing. Sitting around stupefied at what Trump has done (or will do further) is idiocy. It is only our action that can save us – at all times. Pontificating on it is for the talkers. We want to be doers. All the time.

Having spoken about higher time frame, lets take a look at the daily chart – Chart 2. It shows some brisk movements up after a hammer candle at the bottom. Two gap areas have been marked and these will act as supports if there were to be pullback during the coming week. The chart also shows a pitchfork channel (schiff) that I have added. Currently, prices have reached the median line with the rally of last week. So, continuation above last week high will get it past the median line resistance and then aim for the top channel, which is still only the top of the recent rally. So, at best, the daily chart is suggesting only a restoration of status quo from two weeks ago. Not too great. But it also shows the RSI in the lower panel and there is a hint of a range shift signal there and that can be supportive of upward attempts or signal a pullback into the gap supports.

The Hammer defined the low and hence a move below the head of the hammer would probably be a new signal for more dips. Of course, the pitchfork lower channel lies there too. Hence, it may be difficult to break below. The tariff thing is pushed ahead by 90 days already and hence further selling may not occur on this news perhaps. So, this now gives you a bigger range to consider in the days and weeks to come.

But what if this event is really a paradigm shifting one? What if it is going to lead to trade wars and some chaos is going to result? Well, that is a macro thing and for gauging that, we should see the higher time frame chart. Chart 3 is weekly Nifty.

We can note that corrections so far are retraced to just 23.6% of the rise from 2020. Now, that is a minimum pullback, usually seen in strong bull markets only. We have seen a four-year plus bull market and now a six-month reaction. There is nothing to show that prices shall improve and make new highs except our perennial bullish viewpoints. Till now, we did not have any macro event that could shift us out of that bull market setting. The Trump tariffs does carry that punch. So, let us use our charts to set the probabilities for that scenario too.

The major trendline is broken. The RSI is down into oversold levels and hence a rally was due and that pop occurred. Now, if prices come down and break 22,000, then the next retracement support is 38.2% which is placed at 19,230 areas. That may send some shivers down the spine of many but there are also many in the market who are already sitting on that kind (or even lower) of index levels. I never look at levels that are not currently tradable for my style. But now that data is starting to point possibilities, then I must look at it. But here some points must be added.

Since large cap stocks have drawn down quite well (valuation down to around 19x), what can push the market down even lower? Thus, there should be a rally first, from where a decent fall could occur which would fit in with the value equation too. The projections in the market for next year EPS of Nifty is around 1150. At 20x this would give us a fair value of 23,000 on the Nifty. Make it 21x and the value goes to 24,150. To attempt a rally to 24,150 is not overly difficult from here. After all, we did some 1,800 points in a week or two earlier. So, before going for the lower support, there should first be a significant rally.

So, is that good news? Possibly. But it is both good news and bad, actually, because after that rally, which will warm the cockles of everyone around, the market may swing around and head south. The adage of TA is that “patterns will form first and news shall follow later.” Remember this, always.

Does it feel that I am talking from both sides of my mouth? My dear friends, this is the market, where anything is possible because we are dealing with the future. If we have to be prepared to act in the future, then we should be at least aware of the possibilities that exist.

One could complain that I am not showing the bigger picture for the upside here. I am deliberately not doing it because we are all still caught up in the highs of the last four years of fantastic bull market. We don’t need any prompting to buy as we are so eager to do it anyway. But the downside is difficult to deal with for most of us. The least I can do is to warn you about the possibility of its existence. Like everyone else, I don’t want it either. But if I know it may be lurking around somewhere, then at least I shall be wary.

On that sobering thought, I will end this week. Summing up, the road ahead is still unclear. But with the short-term data aligned to offer supports to dips, it may be worth trying out trading buys. The earnings season has started and with the 90-day relief granted to us, we can all concentrate on the data that gets thrown up ahead by stocks which may also go to define sectoral themes ahead. Markets will always have something for the bullish side, it is our job to find it. Thankfully, the whole tariff thing is now down to the US versus China. India will probably eke out some deal and the market will latch on to that and travel down some new paths for us to map. So, the play for the coming couple of weeks is clear: keep a close watch on stocks that offer trading and investing opportunities in the short term. If you are a long term (5-year plus) kind of player, then the whole of the above is just an academic discussion for you to plan some tactical stuff. This weekly column is primarily directed towards the active participant of the market, after all.