And before you realise it, another week has rolled on. Unlike earlier weeks, this time we had the market heading down through most sessions. Promptly, there were enough people to pronounce ‘gone' and lower levels started showing up on WhatsApp messages. Typical market sentiments. But the index did pull back a bit on Friday, but that still couldn't prevent a bearish candle formation for the week.
The main question, with any decline, is always to ask whether the trend got damaged. Chart1 shows the daily chart of Nifty Futures and we can note that the prices dipped to the levels of the most recent swing low and has held there.
Under rules of trends in technical analysis, a move of multiple weeks can pullback up to two swing lows behind and still retain the trend status. So, halting at the first level of support (19,390) is certainly par for the course. There were memes on WhatsApp groups imploring the down-move to stop. These are hardcore bullish trend junkies who cannot bear the thought of the market moving lower, even if normal reactions have to occur.
So, two swing lows behind would take us to the 18,750 area. To some, that may appear to be a frightening prospect. But in the context of the move up from March 23 lows, it would represent only a 38% retracement. Now, in any reaction, 38-50% correction or retracement is considered quite normal.
Notice that the move up from 18,750 area was a swift one with multiple gaps. This poses a danger in case the market slips below this week's low of 19,390. Gaps are non-traded areas in the market and hence, the zone of 18,800-19,200 may be a fast moving area for prices because of the presence of gaps. Just as it was on the upside. Therefore, one needs to be a bit on the guard, especially if one is an active day trader of the market. If one is still long in this market, then it would be best to set a near-term stop around 19,250 levels to avoid some pains of a quick slide to 18,750. Also note on Chart 1 that the area near 18,750-800 has seen a lateral consolidation for many sessions and hence, this area may not be easily penetrated.
What this would imply is that we may see speed if down-moves occur, but they would still not create price damages. However, the word price ‘damage' is relative to one's position and trading style. For those that are following the bigger trends, such a move would be yet another drop into support and hence, a reason to buy or add. But for those that are day or a couple of day-oriented, it can mean a big move which can be traded on the short side as well.
This is the thing with advice. So many people read it or hear it but each one of them may have their own perspective of how to play the markets. So, when I wrote that a move to 18,750 should be considered a normal reaction, it is with respect to swing traders.
For day traders, the takeaway would be that below 19,380, the market can wear a bearish look and below 19,270, the down trend could actually speed up some. Both these possibilities have important implications for short-term traders. Their action will be (and has to be) quite different from those of the swing traders. The latter can wait for the slide and look to enter the market near supports while the former should be trading short actively. Some people may be wondering as to which would be the right strategy. There isn't an answer—they are both correct with respect to the time frames they address.
Getting back to the markets, one thing that prevents me from turning negative is the total absence of any bearish narrative. The results season printing a better number than what was expected by most. You could add monsoon pick-up to that after a bad start but with excess rain in many parts of the country, rural pick-up is still a question mark. FPI flows were strong. That could have been a FOMO and that appears to be short-lived as in the last 10 days, a lot of the positioning from that source has flipped from net long to net short.
Global cues also lacks story for now and dollar strength of late has yield spike in U.S. to justify it but that's more to do with the recent downgrade than anything very specifically positive about its trends. It's been a while since any geopolitical talk has been indulged in and so oil appears to be trending higher on production cuts lingering. It is to be noted here that both these items (crude oil and dollar index) have been on a downtrend since September 2022. China talk is a bit muted for now while the war in Europe has lost mindspace recently. So, you have all the ingredients for the moment for some consolidation until one or several of the factors changes tracks. Crude could possibly be a turner as it has reached a support on a half-angle trendline support. See chart 2.
Time cycles are pointing to some consolidations too as August is full of turn dates. Typically, this means that trends will turn every few days. When trends do that, it is difficult for any trend direction to sustain. Ergo, we should be expecting a sideways price move. There is no specific price and time match coming through anywhere as of now and hence, larger degree tops and bottoms are not expected to form. Here is a chart of the bank Nifty with some Gann angle lines and Emblem-based time dates.
The option positions seem to indicate a set-up geared towards ranging trades. From the read of the table it seems like the players are mapping for a range from 19,300-19,700 for the initial part of the week. This fits in well with the fact that the gap area above on the daily Nifty fut charts are placed around 19,750, while the 19,350 area should start seeing defense propping up. So, a ranging scenario may see the index being confined in that window. A breakout beyond that band is required for some trended action. I will be surprised if a sustained move happens. However, if it does, I would be more wary of a down-move extension than any in the upward direction.
So, it will now be down to stock-specific moves that will be based on news and order flows. Traders may need to be quick of feet in order to take advantage. The small and mid-cap space is quite active and scores of names there are still offering potential for momentum trades as news keeps popping up. Maybe, shift concentration to that area to profit in the weeks ahead.
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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