Nifty In Technical Charts: Still A Pullback In An Uptrend

In the last week’s letter, I wrote about the shaken sentiments and how they differed between the indices and the stocks. This situation continued into the week that just ended.

The indices did take a knock—that was on the cards anyway—and the reason for that was the prices of both Nifty and Bank Nifty running slap into resistance of the pitchfork that I have been featuring for the past few letters. Here is the updated picture of the weekly chart once again.

As can be noted in the highlighted area, the entire week was a sharp drop and the situation was worse where individual stocks were concerned. This is mainly because traders have been playing options in indices and futures in stocks. So, the long unwinding that occurred in stocks saw greater price damage compared to what we saw in the indices.

The weekly candle is a bearish one—not surprising considering the consistent fall through the week. It is also reasonably long-bodied and hence to be taken seriously. But, if readers recall, I had already voiced my concern about the trends being choppy and down-biased in last week's letter and therefore, the formation of such a bearish candle is to be expected.

In such a bearish daily chart scenario, it is natural that all the indicators on the daily charts would have hit the skids. But, when we are examining the trends, we should see these indicators in the context of the larger picture.  Here is a picture from my software Neotrader which shows the set-up of a few indicators across different time frames.

We can easily note that the weakness is only in the intraday time frame while the market still retains a bullish flavour in the higher time frame indicator levels. This shows up the current fall to be a pullback within an overall uptrend only. Thus, we should be looking for defining support zones where we can look to buy the indices or stocks.

So, obviously, the next job is to define such supports. But before doing that, we should also lean back and look at the bigger picture. On the weekly charts (see chart 2), we find that this decline was the first of the reaction candles.

We have to understand that when a market has moved for multiple weeks and this move is on since March 23, and so is about 5-6 months old, it cannot be reversed with just a single bearish candle.

At the very least, a market after some sustained moves shows a 3 or 5 candle move. This means, we will have a few more weeks to go in the reaction mode before we can consider the reaching of supports to buy into. Again, this fits in with what I had written in last week's letter that until October-end, we should be in a corrective phase.

That said, we can use the same tool that we have used earlier—the Pitchfork channel to define a support. This is shown in chart 2 as well and it is noted that the lower channel of support lies around the August lows near 19,200.

The situation is a bit worse in the Bank Nifty (see chart 3) where we find that the recent week bearish candle is actually made outside the pitchfork channel. To find a support similar to that in the Nifty, I will have to expand the channel some (done by 0.618 extension of the channel) and that gives a support near 43,750.  Anything beyond that would be a bearish signal on the Bank Nifty and this will, in turn, impact the Nifty too bearishly. So, I would certainly watch the August lows of Bank Nifty rather closely in the week ahead.

Possibly, the adverse news flow surrounding HDFC Bank Ltd. is currently taking a toll on the Bank Nifty plot as it is a big heavyweight. We could see this major bank stock drop some more (since there seems a consensus view towards it) and prices of Rs 1,400 or sub that may be seen, thus maintaining pressure on the Bank Nifty. So, do keep a watch on HDFC Bank prices too.

Some weeks ago, I had featured a ratio chart of private vs PSU banks and had opined that the latter was now getting into good position. Chart 4 is the updated version of this ratio chart. Note that the situation is unchanged and that the private banks are still quite pressured. Therefore, the focus on PSU banks can be expected to continue.

They have been a recipient of some good news coming from the bond markets. The inclusion of Indian government bonds in the JPMorgan list is a big, big development for our country and this is going to set off a whole new set of dominoes, one among them being continued patronage of PSU and other bank stocks. This is such a big development that we may have something connected with it emerging every couple of weeks, impacting the markets in various ways and doubtless, chart pictures of different kinds shall emerge. So, definitely remain tuned into that space for the coming year or more.

I spoke earlier about the current fall being a pullback within an ongoing uptrend and this bond market news will ensure that a cushion of sorts is laid out for the equity markets into the future. So, going ahead, we will more likely see only some series of short-term declines and nothing more serious than that. This, of course, assumes that there shall be no other major fundamental developments of any kind across the months ahead. Barring that, the Nifty is on course to ride into new highs steadily through the coming couple of years.

The time count write-up from last week bears repeating. Here it is: “One of the reasons I would want to be a bit wary is because of the time count. My cycle studies indicate that October will not be a bullish month. I had already warned that beyond the first week to ten days in September, the trends may start to falter. Volatility has set in. I expect this to continue into October as well. The only sustained time signatures I get for the days ahead is in the last week of September, when the market trends may wear a better bullish look. But this is a short window, replaced soon by uncertain days.”

And the conclusion bears repeating too. “This is, of course, not to mean that the market will be devoid of opportunities. There will always be something in play and news flow is bound to be there in some fashion or the other. For example, the September-ending results season should start from mid-October and will provide some news inputs. But, if the overall trend is not favouring sustained trends, understand that even good news may produce only short-lived moves. It will therefore require more than ordinary good news to create sustainable trends.”

Rallies towards 20,000 may see supplies emerge, while dips towards 19,200 would see buying emerge. So, that is pretty much the range I expect the index to be locked in for the next month or so. Within that stock-specific opportunities shall keep showing up. A keen eye with a swift hand movement shall help us to nail some profits from trading.

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.