In the last week, I had written that it would be easy for the indices to get into a trend (owing to the small range shown earlier) and quarterly results would probably provide the trigger for the moves. When the market started at around the levels of the last week, and began to work their way higher, it was evident that bulls were getting their act together to launch an attack at the resistance levels and this happened right on Tuesday, when the 17,700-17,800 barrier was overcome.
In an earlier letter, I had mentioned that the current up move should have minimum legs to 17,800 and beyond that, we could continue to 18,050. Maintaining a steady pace from Wednesday through Friday, the Nifty pushed its way to the next target and finished the week in style, near the highs. The Bank Nifty did likewise, hauling itself all the way to a new swing high for the week. Thus, the bullish expectations built from February end for a target of 18,000 has been realised. Those that followed this train of thought could have banked some nice profits of around 1,200 points on the Nifty and nearly 4,000 points on the Bank Nifty. Chart 1 shows the progress from the bottom in March.
The chart also shows that the prices have moved into the 61.8% retracement zone of then fall from December to March. The whole week showed green candles with Friday showing a surge towards the end. Looks like bears threw in the towel? We have seen this happening many a time- that bears concede just as a resistance is being hit and bulls give up just as a support is reached. So, the question to answer now is: can the bulls keep the show going?
Well, first up, note that the RSI indicator on the lower panel is showing a good slope and movement and has just poked past the 70 levels too. That suggests that good momentum support exists for this up move. The good news here is that even if I step down into lower time frames, I am not seeing any divergence patterns! So, that would imply more upsides. Second, you know what has been pushing this market higher? Scepticism. People have been sceptical of this up move all through as the news flow has remained non-supportive of an advance. So, there was no willingness to hold longs and indeed, lots of CE shorting in the options area. The sustained up move through the week would definitely have taken toll on the call shorts.
With the shorts out and longs created, the reaching of the resistance and the move of the RSI into overbought area could produce some pullbacks. So, active traders need to be wary of that. However, for swing traders that would actually present a good opportunity to buy the index again.
Chart 2 shows Gann angle lines drawn to the daily chart of Nifty using the up and down swings. This shows two things. First, the up move has crossed the resistance angle line from then top, and hence, the trend has taken on some strength. Second, the support angle derived from the decline shows a support emerging around the 17,600 area. The most recent swing lows in the recent advance is around 17,600 as well. We note from Chart 1 that the next retracement resistance, if rise continues, lies at the 78.6% retracement near 18,400-18,500. If I use a Gann price cycle method, there too I get some projections towards 18,425.
So, with an expectation that the price rise shall continue, then the expected target is around 18,400-18,500. A similar price cycle exercise for the lower levels puts the expectation levels near 17,450.
In the previous letter, I had mentioned that May would be a ranged month. What I had neglected to mention is that the consolidation expected for May would be at levels higher than seen in April. This is yet another point in support of continuation of the trend higher in the coming month. So the new range expected for May is 17,450-18,450. Lower levels will be buying opportunities because, minor cycles point to end of May showing a rise and therefore the low for the month may be during the second to third week.
The Bank Nifty has been faring better (as it was expected to) and here the 78.6% retracement has already been exceeded. Here the support zone is seen a bit below, around 41,400 levels. Hence, if market has to undergo a pullback, then chances are that it will be led down by banks (just as the rise was also led by them). So, we need to watch progress of private banks closely. PSU banks' earnings are pending but they don't move the needle for the Bank Nifty. So, while I would continue to remain bullish on the market as a whole, I would watch the banking pack for some reaction cues. But, to reiterate, the dip is to be bought into, and this would apply to the banking pack as well because, here too we find that new swing highs made last week are well accompanied by fresh momentum. Chart 3 shows the set up.
One of sectors that gained last week was the IT pack. No doubt they were oversold and there has to be an element of short covering impact in the gains of the sector. Hence, I would certainly not rush into buying any of the stocks just yet.
Reliance was the other biggie of the earlier week but it left it quite late to take charge, moving up only on Friday. So, maybe some heft left in it for the week ahead. This is something that I would track.
One of the sector indices that hit new all time highs was the PSE index. See Chart 4
Now, here is a sector that is seeing some solid action with several stocks (HAL, REC,PFC etc) all being powered to their all-time highs. Clearly, institutional buying is going into these. Traders can take their individual bets while investors can probably grab an ETF.
The Nifty Midsmallcap 400 index is also showing some traction. Reveals retail traders getting into action. Best to follow the flow of results here and see which one the market likes and then get into those. Momentum investing should be possible in May.
So, a ranging month with a range at a level higher than April and where participation should start widening and breadth should pick up. This is the expectation for the month. For the week ahead, it may continue to remain a mixed bag. Most banks are done, most IT are done. So attention may now shift to pharma where we are seeing good activity. Among results Tata Steel and Titan are backended for the week. So, no big names to shake the market in the earlier part. Monday is a holiday too. So play with some caution, allow prices to come to you rather than chase them.
CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise, and NeoTrader; and 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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