The month was expected to be tentative and it ended with tentativeness. We had a red candle for the month after four successive months of green candles. The low of the prior month was broken and it closed below as well. So, that is not good news—in case there is some continuation below. Therefore, the low of August (19,218 for futures) becomes an immediate line in the sand for the market. For bulls to retain their hold, this low should not be violated decisively. Chart 1 this time is the monthly chart of the Nifty futures and is annotated with a pitchfork.
It can be noted that the rise, albeit reaching a new high, ran into the median line of the pitchfork and the following month has shown a bearish candle. Now, the median line placed at 20,175 would become the immediate resistance on the monthly chart. No doubt, hitting those levels will get the sentiment juices flowing as it would be a new high (and the crossing of 20,000) but we do have to remember the presence of the median line at that time as it will act as a resistance. Only a decisive crossing of it can take prices higher.
But as things stand right now, people will be more than happy to take that push to new highs if it were to happen.
The Bank Nifty fared a little worse than the Nifty, in that we saw a little more price damage in it. Prices had an open equal to the high pattern (mentioned at the start of August) and there is a clear break and close below the prior month low. So, it would appear that the banks have a greater job on their hand to do to regain bullish footing if they desire to. On Bank Nifty, too, we are able to draw a pitchfork and here as well we find that the recent high was made along the median line. Thus, it is obvious that the bulls have their work cut out for them and need to show a lot more resilience in the days ahead.
Unfortunately, there doesn't seem to be much by way of news or event triggers that may propel the market higher. The news about a special Parliament session to be held from Sept. 18 has created some ripples in all circles about what is coming. The market hasn't really reacted to this yet but cannot remain immune to it either. One thing the markets don't like are surprises and typically, at such times, the markets prefer to take a slightly defensive approach. So, to expect any big moves in the first fortnight of September may not be prudent.
So, should we expect some big declines ahead would be the next logical question? On that count, the answer still remains a 'no'. Now, consider this. The last swing low before the highest high was on June 26. The Nifty took 17 days to race up to record the all-time high on July 20. Since then, it is now 30 days and the index is still far away from the low of June 26 (18,665). Normally, a change in trend is signalled when the last upswing is broken in lesser time than taken to form it. Therefore, this low of 18,665 should have been broken in less than 17 sessions. Here, not only is the swing low not even approached, the time taken has also been much higher. Hence, the conclusion is that there is a change in direction but not in the trend.
I had spoken about August being a rangebound and slow month. The above is evidence of the same. This was based on time cycle study. Looking at the time cycles for September, the picture is somewhat similar. There is some bullish trends visible in the first week (up to Sept. 5) and thereafter the market gets into a meandering mode until it hits a rising patch in the last week of the month. Hence, chances are that we should see some drifting action after the current small rally (started Aug. 28) finishes. Chances are that the low of June 26 (18,665) may come for a retest and not much more.
One has to be slightly more alert in Bank Nifty as the low of June 26 is at 43,311 and the rise took 22 sessions to hit the all-time high. The current reaction is now 25 periods already but prices have dipped a lot closer to the earlier swing low. So, the bulls here are weaker as has already been discussed earlier.
Could the action be shifting out of the Bank Nifty towards the FinNifty perhaps? Volume and participation in that index has been increasing by leaps and bounds. In a recent report on CNBC, it was revealed that the Fin Nifty volume in options is already at about 50% of the Bank Nifty. Not just that, the FinNifty had a longer upswing to reach the top (29 days) and the time taken in the reaction is 25 days so far. The important low is 19,257 and that should not ideally break if the upward pattern has to be maintained. See Chart 2 for FinNifty details.
But, what if the attention of the market is moving away entirely from the large-cap area? Looking at how the small and mid-cap stocks have been racing away, it seems like a large part of the market is not focusing on the main indices, etc. An interesting chart to gauge this would be the BSE Momentum Index. See chart 3.
Here, we can see that the up-move has been consistent for six months. And, prices have not even hit the pitchfork (which we drew to the other indices too). More interesting is the constituents of this index. Table 1 shows the stocks contained.
All the names (with a couple of exceptions) are second-tier stocks among the prominent names. But the interesting part is that almost all of them are in very good trends and continue to be so as of now as well. This would imply that this index may have further ground to cover as many of these names are poised at or created new breakouts. This can lead to extensions of moves and since many of them are popular names as well, the sentiment will also be in good shape.
This argument is clinched by the powerful drive that can be seen in the Nifty MidSmall400 index. Chart 4 shows this chart along with a Relative Strength indicator with the Nifty. It can be noted here that this entire run from March 2023, we find that the Mid and Small area has been outperforming the Nifty. We are all taking notice of this phenomenon in more recent times but if we look at the longer term also, we find some great outperformances. Meaning, when the outperformance persists, the rise in the main indices tends to persist as well.
Given that this index is still pushing upward, it should continue to support the upward action (overall) of the Nifty and that would imply that dips in the coming weeks should still present us with buying opportunities.
Thus, we have supportive evidence telling us that there is nothing much to fear about the trends even if the direct evidence seems somewhat iffy. Relative analysis is often the key to get a bigger view or perspective on what is happening.
So, we shall end this week's examination of evidence with the comforting thought that the lower levels in the market, if they were to present themselves, continue to remain a buy. In the near-term, we have a rising trend for the coming week. Beyond that, we may have some consolidations and drifts or some choppiness for a few weeks until the last week of September, when bulls should be making a renewed attempt to take the market up. Stock-specific action would be the way to go and stocks from second tier or from the mid-cap area may provide good vehicles for trading and short-term investing.
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.
The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.
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