Nifty In Technical Charts: Declines May Unfold

In the last week's article, I had covered the possibility of the market breaking below the supports provided by the pitchfork channels. It took till the end of the week for that to happen but it was on the cards through the week too as the indices struggled to stay aloft. Now, why did the support break on Friday when most of the news was already out by then is a question without an answer for now. It is out there somewhere, for sure, but not visible to us right now. But that point is largely irrelevant in the context of what we need to do next.But first a look at how the markets played out across the week. Chart 1 shows the moves. The week’s move has been binary—initially up and then sharp down. The initial mild rise probably lulled people into some sort of complacency and those people probably got hit the hardest because they would have a bunch of longs that they may not have been able to get rid of. Hence, the ending of the week may have proved painful for many..A small change from the usual pattern. This time I have shown a trend following measure (on the price) along with a high sensitivity oscillator. The market turned on Wednesday (marked with an arrow), and since then the trend has been down into the end of the week. There was a small attempt to rally on Friday but that too has been beaten back. Note how the rally attempt did not stimulate the oscillator at all. There is an overall resistance cloud as well on top, so the index has a lot of work to do before it can reverse the intra day trends.Therefore, the view of the last week to be alert for some flips should have been good enough to take evasive action when called upon. As ever, what’s next? For that I would want to go over to the bigger picture. In Chart 2, I show the same indicators as in the intraday chart given above and we can find that the trends have flipped over, even before the arrow mark shown (this can be seen as a small arrow in the daily chart as well). Prices are below the trend-tracking tools and more ominously, the trend oscillator seems set to pick up if prices continue lower. So, this throws up the first warning for the week ahead. If prices continue below Friday lows of 18,300 area then short-term players need to be thinking of sell trades rather than buy trades..I would think that the market right now would be quite sensitive to news flow, either domestic or foreign, and, therefore, one needs to be alert. It would also be sensitive to flows from the FPIs. Friday sell figures were pretty large and that is a warning to track that area in the week ahead. To study the lower prospects, we now go to the Ichimoku (Chart 3) on daily. .On the chart, I have marked points 1 through 6. Each of these elements of the Ichimoku system tells us a story of what is happening and how we can then put them together.#1 is the Kumo and we see that both span A and B are flat. This tells us that the uptrend is stalled and could well get into some consolidation ahead. The same view is being confirmed by #2 where the Chikou span is getting into the prices.#3 denotes the T-K cross under progress and this denotes the possibility of a correction emerging from here. #4 and #5 are markings on the RSI and ADX oscillators, both of which are indicative of some weakness setting in.Finally, #6 marks the current Kumo, which is placed a good distance away from current prices, denoting that there is room to decline if one were to occur now. The Kumo runs 17,950-17,650 and so that is the potential for the decline. Using forecasted resistance lines, the stoploss on this view would be on a close above 18,715 in the week ahead. Using time cycles on Ichimoku, I find that the next cycle time is on Jan 5, and if steady moves occur, the Nifty future is then likely to drop down a minimum of 17,870. Faster price moves may lead to deeper targets.Next point to consider is, what can negate these prospects? There, much of the answer lies with the Bank Nifty. As discussed earlier, with financials, IT and energy forming about 60% weight on the Nifty, we have to see the trends there as well to know what the Nifty can do.Among the three, only the Bank Nifty seems to be still in good shape. While its intraday patterns are aligned with the Nifty, the bigger picture still remains clearly bullish. The IT and energy indices don’t seem to pack the necessary punch and, so, it will be left almost completely to the banks and financials to save the day. Can they? I don’t know. All I know is that I will be watching for weakness to show in this space for me to get confirmation that the Nifty will slide. If it doesn’t, then possibly the Nifty doesn’t decline that much. Between the two I would opt for the surer alternative. Chart 4 shows the picture in Nifty IT where the decline already seems to be on, after the rally completed..So, the things to watch during the week are:Does last week’s low break (especially in Bank Nifty)?Is there any strong upward action in Bank Nifty?And is IT or any other sector able to grab some positive trends on any news flow?These can give you an idea whether the expected fall in the Nifty will occur or not. We have made that the main plank for the week can be a decline and hence would be watching for factors that would either confirm or deny this possibility.Put-call ratio has dropped sharply to 0.56 for Nifty and 0.67 for Bank Nifty, implying heavy call shorting. While short call squeeze can yet save the day for the indices, it does require considerable action to be put into play. If this has to happen, heavy weight stocks (Reliance, private banks, IT majors, etc.) will be managed through the week. But if it is the operator gang that is short on the options, then we may see market getting pushed down.Coming to stocks, I would use the set up in the Ichimoku lines to tell me a list of strong and weak names to consider in the week ahead. For this I will use the Neotrader IM page, with the setting for weekly bullish and bearish stocks as below..The stocks are picked basis of high bull score and bear score (shown in the tables) and also on a trend clarity score (not seen in the table but present). Only a few stocks show up on the bearish list because the market has been having a bullish dominance so far. This can be a working list at the start of the week and names can be added as the week flows.What does one do with existing long/short positions? That’s an easy one—if declines emerge, then it is better to simply book loss and move aside. Fresh shorts to participate on the downside can be a dynamic consideration during the week. If holding shorts, then one can consider taking bigger profits as the decline unfolds. If, however, there is no specific decline, then rallies intra-week should be used to get out of long positions while charts should be reassessed in short positions.Looks like a week to be active..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.

Nifty In Technical Charts: Declines May Unfold

The market would be quite sensitive to news flows, either domestic or foreign, and investors need to be alert.

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Nifty In Technical Charts: Declines May Unfold

The market would be quite sensitive to news flows, either domestic or foreign, and investors need to be alert.

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