The HDFC twins spoilt an otherwise good week for the market. Tumbling the whole day on Friday, the twins dragged down the Bank Nifty and the Nifty, which shook up the good sentiment prevalent until then. This was after some great results (and dividend) from HDFC Ltd. and a push to all-time highs by HDFC Bank! The disappointment there was huge and resulted in a day-long selloff that took off 826 points from the Bank Nifty in a single session! The twins accounted for 155 points decline in the Nifty on Friday!
This tells us that the rest of the market was nowhere near to being so bearish but the sentiment was clobbered all the same, as it has been a while since we had such a sharp decline in the Bank Nifty. Since most of the day traders are present there, the damage to the sentiment was probably greater. But this is good news, in a way. Ostensibly, the fall in the HDFC twins was on some reckoning that there would be some large scale outflow from the stocks post the merger. This is silly because there was, I recall, a large rise in the stock some time ago for precisely the same reason! Clearly shows that the market shall interpret a news based on current sentiment. The merger is effective only around July or later. So to clobber the stocks as though the event is next week is silly. Therefore, market is bound to rally back.
It can be seen in Chart 1 that the Nifty didn't really buckle down under the pressure on Friday and in fact retreated only to the level of the prior swing lows. This fall being so limited (not even 23.6% of the last rise), implies unwilling sellers in the Nifty.
Using Gann's 90 degree trendline, I have drawn the down resistance line, and on Monday, if the Nifty manages to recapture the ground above this trendline, that will be the end of the correction. However, note that if the fall continues below Friday lows (also former swing low) at 18,100, then correction can extend towards 17,980.
Matters appear to be a bit tougher in the Bank Nifty though. The sharp fall would mean that a trendline following the price action would also be a steep one. The prices have also broken below a double support trendlines. So, here, I have drawn an additional 2x1 angle trendline that should be crossed for the prices to recover their trends. This starts at 43,400 on Monday. Not too difficult but not too easy all then same. See Chart 2 for the Bank Nifty.
In the last week's letter, I had alluded to the fact that the RSI indicator had not shown any divergence pattern in any of the time main timeframes and how that was a bullish set up. In line with that, the index did go higher. In Bank Nifty I find some additional resistances crept up as can be seen in Chart 3. The prices have slammed into an upper channel of a pitchfork.
So, even as the momentum status remains unchanged, the pitchfork may ensure that Bank Nifty may fall at least till the median line which is at 41,800 levels. A pitchfork drawn on the Nifty is shaped differently and restricts then fall to around 18,100.
Based on moves till now (since the March bottom), the main support zone for the Nifty has moved up to around 17,500 area. Hence, the trailing stop for swing traders should now move up to this levels. For the Bank Nifty, the support is seen at 41,800. The time count for the corrective decline is seen to around May 15, so we may expect the week after next to produce some declines. It's quite possible that the Bank Nifty may remain in a corrective mode longer than the Nifty. Looking further out, the period from May 20-31 seems to be one for a rise and hence option traders can take note of this for expiry plans.
Chart 4 shows India Vix and we see that it has been falling, breaking a well formed support ledge. No doubt it picked up on Friday but the overall trend seems down and that shows a market that is not nervous about declines. So a sceptic sentiment is more about fear of heights than any genuine belief about declines. This kind of sentiment will ensure markets have shallow reactions and continue to poke higher, making it, yet, a buy-on-dips type of market.
Results so far have been mixed. Banks have shone brightly but only ICICI Bank has been rewarded by the market so far. I am seeing switch buying occurring in the stock. I have done a video on the results and price expectations of this stock and the same is available on my website or on YouTube. Those interested can check it out. Another stock with good results and great chart set up would be TVS Motors which can be looked at for multi week trades. Hotels have done well as a group and Indian Hotels can be a good play for May futures.
So, we continue with a buy-dips policy. Expectations are for market to remain upwardly biased with a possible reaction time around the May 20-31 window, with a pickup again to end the month better. Nifty is expected to perform better than Bank Nifty this month. Stock plays shall continue to pop up and important for us to see where the market is ready to reward (or punish) the stock post its results.
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 BloombergQuint or its editorial team.
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