We ended another flat week that saw some localised volatility. I counted 16 weeks now that we have been under a reaction mode. Now, that is a long time for an active trader for not having the advantage of a market tailwind. And that is why the difficulty.
For those that don’t get the analogy, tailwinds are factors and events that help increase growth or cause positive effects on profits and revenue. Bull markets carry significant tailwinds, propelling stock prices higher. Now, for four months, the tailwind factor has gone missing. In this context, FII selling or poor Q2 results can be thought of as headwinds — factors that decrease growth.
We are into the Q3 results season and up to Friday, we saw some 123 companies declare results. The net sum of those 123 shows an even situation, with half of them positive and the other half negative. A small sales growth and a small profit growth. Nothing that shakes up the market positively but nothing that sent it hurtling down either. So, we wait for a larger sample size in the week ahead which might tilt the scales in one direction.
By that time, though, we will also run into the pre-Budget week and some rumours and hopes and expectations and fears will all get mixed into the talk.
This is the time for big names to knock up some big innings. And for some new players to emerge on the scene. But IT majors, always the first off the block, have not really obliged. That was not too encouraging. Chart 1 shows a possible Range shift happening on the weekly chart of the IT index.
For those that don’t get the analogy, tailwinds are factors and events that help increase growth or cause positive effects on profits and revenue. Bull markets carry significant tailwinds, propelling stock prices higher. Now, for four months, the tailwind factor has gone missing. In this context, FII selling or poor Q2 results can be thought of as headwinds — factors that decrease growth.
We are into the Q3 results season and up to Friday, we saw some 123 companies declare results. The net sum of those 123 shows an even situation, with half of them positive and the other half negative. A small sales growth and a small profit growth. Nothing that shakes up the market positively but nothing that sent it hurtling down either. So, we wait for a larger sample size in the week ahead which might tilt the scales in one direction.
By that time, though, we will also run into the pre-Budget week and some rumours and hopes and expectations and fears will all get mixed into the talk.
This is the time for big names to knock up some big innings. And for some new players to emerge on the scene. But IT majors, always the first off the block, have not really obliged. That was not too encouraging. Chart 1 shows a possible Range shift happening on the weekly chart of the IT index.
For a sector that almost everyone is bullish on, this kind of pattern appearing is not good news. Readers are cautioned not to have too bullish a view on prospects here unless the data changes in coming weeks.
Problem with mainstream media and broking house reports is that almost no one is ready to call for declines in big sectors and stocks. So, you read statements like "Infosys is the best play in IT for the coming year". Undoubtedly, it is one of the top dogs of the sector. But the REAL question that faces a retail investor is, 'Will I make 30% in a year buying Infosys or HCL Tech (the other top name in IT)?' And there, you will rarely, if at all, get an answer.
The general news front prefers to cut a convenient middle path so that it can't be accused of being downright wrong. This is true whether it is the media or your broker or even your friendly neighbourhood tipster. The amazing thing about all this is that no one, repeat no one, is being deceitful. Indeed, it is the opposite — everyone in the market is actually helpful! But whether their ‘help’ is actually one, is for you to decide.
Same is true for this column too. It is my opinion of what is going on around me. The problem is, there are as many opinions in the market as there are people. So, how can anyone decide who is right or wrong? In that sea of opinions, it is the job of an individual to make his own decision about which of the many sounds plausible, logical or well-reasoned enough. I mention this in the context of the result season and a big event ahead, where noise will be substantial and the air filled with opinions. Be careful.
For instance, look at the Banking sector index. To a man, all the opinion makers are bullish on the prospects of Banks and Finance. Everyone agrees that a $5-trillion-economy target cannot be achieved without the participation of the banking and financial sector. So, why is the Bank Nifty chart then not depicting robustness? See chart 2 of Bank Nifty weekly. It actually shows trends faltering!
A pattern that has a look of a head and shoulder, a break of the nearest support zone, a break of a multi-month support trendline and a clear range shift signal on the RSI too. The action of people that make a difference (seen on the chart) is certainly not matching the talk (very bullish)!
The main point I am making here is that, oftentimes, the opinion maker's actions can be quite different from their talk. But we the public get to hear and read their talk. It is only the market, read through charts, that tells what the real action is. And, in the Bank Nifty chart, we can see that the action is consistently one of selling. But in the last four months, have you heard even a whisper to lighten up in Bank stocks? Bet you didn't.
Hence the need to keep our counsel. One of the advises for the market is sab ki suno, apni karo (hear all but do your own thing). Do that.
Moving to the market, chart 3 shows Nifty futures with CPR weekly. Two observations can be made.
One, prices traded under the last week's CPR showing that weakness was present. Two, the next week CPR is a very narrow one. Usually, Narrow CPRs indicate the possibility of a trend emerging. After a whole week of consolidation, the chances for a trend exists. Hence the trading pattern from Monday needs to be watched for a downside breakout.
Why downside? Because the trend preceding the pattern has been down and with a weak finish for the last week, a continuation is to be expected. The CPR is signalling that if the Nifty future trades consistently below 23,260 area, then the next set of supports could be 22,600–800 and then 22,350. The next turn date for January is in this week, starting on the 20th till the end of the week.
Of course, a narrow CPR can also create an upward trend for the coming week. But the surrounding factors don't seem to favour that. Trump assuming office is not a factor because its aftermath cannot be forecasted. Budget is still away. The US market feeds wax and wane currently. Derivative data is negative and positioning is bearish. But short squeezes require additional new triggers and flows and none are visible right now. That leaves only earnings surprises. But no big Index names except maybe Kotak, Dixon and sentiment moving items like Paytm, Zomato in the next week. Life insurance companies cheered last week and ICICI Prudential is scheduled this week but that again won't move the needle for the sentiment. Hence, the odds of moving higher are not too high.
But, there is one sliver of light in this tunnel. This is the increase in the FII Index short position that got added to substantially on Friday. Currently, the FIIs index future shorts have reached 3.26 lakh contracts. Now this is a critical level reached by shorts. Chart 5 (courtesy Strike.money) shows this from a historic perspective. I have marked the area in the 3.25-3.50 lac contracts area, which is a historic oversold area and from where markets have bounced every time.
The FII index future shorts reached this extreme oversold zone, from where sizable rebounds have occurred in the past, five times before, viz. March 2020, June 2022, March 2023, October 2023. June 24 and now. The bounces from such points have been very large ones, creating significant swing lows.
We can note that such swing points don't tarry in reversing and that would be the best news that one can have at this juncture of the market. This is not a regularly watched data and hence, its impact may be swift too. The 200-DMA support is a widely tracked indicator and therefore, the market has taken quite a while in deciding to reverse or not from there. But historically, as we can see, turns after this oversold event are swift. Besides, if no one is really looking it and the talking heads are all about quarterly numbers and Trump and budget etc., then we may even get a slight advantage!
Sometimes, when sentiment is cracked, a small dose of good news is also enough to turn the tide. Too, this event is happening right into the time change window! What we need to watch for, then, would be for a move in the NF beyond 23,500 and for the Bank Nifty to get past 49,500, or better still, 50,000. 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.
Remember I stated earlier about the possibility of a trended week ahead? The derivative data that just came up by Friday will now ensure that we can have some big moves emerge in the next week, which may see a move of at least 1,000 points of Nifty or more! In the coming week, track the positions for evidence of futures short cover or creation of long call hedge and or rise in short puts.
Thus, we now have an exciting week coming up, one where the pain of the last four months may ease for a while. But typically springs from oversold status are quick and short lived. So, don't expect such upmoves to bring back the bull market. But let's be in wait for a nice rally too.
Thus the coming week promises to be a 1000-points mover!
CK Narayan is an expert in technical analysis, the founder of Growth Avenues, Chartadvise, and NeoTrader, and the chief investment officer of Plus Delta Portfolios.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
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