Nifty This Week In Technical Charts: Time To Be Wary Of Nervous Nineties

For long we have all remained complacent that every dip should be bought into. Maybe that is due for a change? Let’s be wary.

<div class="paragraphs"><p>(Photo: Wance Paleri/Unsplash)</p><p></p></div>
(Photo: Wance Paleri/Unsplash)

The Nifty almost hit the 19,000 mark last week (top on Dec. 1), making it to 18,998… somewhat reminiscent of batsmen getting out when they hit the '90s. But should we declare the trend to be out? Perhaps a bit too early to take that call, yet.

As a departure, a different intraday chart this week to highlight the price action. Chart 1 is a relative performance chart of the Nifty and the Bank Nifty through the week that just ended. It can be seen easily that towards the end of the week, the Bank Nifty (once again) started outperforming the Nifty. See the two plots going different ways. Let’s go and check if the fall in the Nifty is something noteworthy.

Nifty This Week In Technical Charts: Time To Be Wary Of Nervous Nineties

In chart 2, I have featured the intraday chart of the Nifty with some more annotations. The first point is that the top hit was on a perfect 1.618 extension of the prior contra trend, a typical move seen in the short term. The fall was gradual, creating some intraday consolidations but maintaining a downward path nevertheless, until it hit some supports. These were by way of former swing high as well as a 62% retracement of the most recent upward leg. These are annotated on the chart. Note also the rectangle highlight on the chart: this is the zone of consolidation that occurred during the week and hence this area will provide some intra-week resistance if the Nifty attempts to rally. This lies in the 18,650-18,725 zone. Unless the Nifty spot is able to overcome these levels, further gains in the week may be difficult to achieve. Hence, that is the first element that traders must track during the week ahead.

Nifty This Week In Technical Charts: Time To Be Wary Of Nervous Nineties

Referring once again to Chart 1, we can recall that the Bank Nifty has been hinting at a bigger outperformance versus the Nifty for a while now and past several weeks of articles have mentioned this fact. Thinking along a different line, we should wonder why the Nifty is such a laggard despite the Bank Nifty flashing signals of bullish intent. People have been encouraged by the new highs hit by Bank Nifty (ahead of the Nifty) but mystified by the lack of follow through in the Nifty. This prompts one to think whether some sort of distribution game is afoot?

Consider this. The Bank Nifty is about 38% plus weightage in the Nifty and the only sector performing consistently within the the Nifty pack are the financials. Now, within the Bank Nifty, about four-five stocks have a weightage of nearly 70% on the index. Hence, if those 5 stocks are ‘managed’ then it is possible to control the moves in the Nifty. Next, if we look at the stocks within the Nifty, we find that only about 20% of the names are trading at or near all-time highs. In the Sensex, that share is just about 5-10%. New highs not accompanied by improved breadth is often a hint of some problems ahead.

In that context, one can take a look at the entire market breadth as well and this is shown in Chart 3 for the Nse Advance-Decline. The chart shows the A-D line for 2022 and we note that the line has been pretty much keeping pace with the Nifty as it declined into a bottom by June. In the subsequent rise of the market, it is evident that the rise was not accompanied by a concomitant rise in the breadth. Worse, the breadth actually faced a deterioration post the September high and has been actively deteriorating even as the index kept hitting higher levels. Good market highs are often accompanied by such breadth divergences and therefore the question posed above becomes valid.

Nifty This Week In Technical Charts: Time To Be Wary Of Nervous Nineties

Continuing the focus on banks, one of the strongest areas of interest has been the PSU lenders. The run there has been super and across the board with many names notching up great gains. Chart 4 shows the situation in the PSU Bank index. It has clearly reached a Fibonacci projection target in the last week. Associated indicators within the stock charts of PSU banks are also suggesting that the uptrend here may be nearing some exhaustion. Hence, some profit taking may be in order here.

Nifty This Week In Technical Charts: Time To Be Wary Of Nervous Nineties

Can there be a tipping point and can that be identified? I believe the sharp fall in IT names on Friday—caused by HCL Tech lowering guidance and a report from CLSA suggesting there could be some declines in many IT names (IT index down 6% this week)—can be one trigger. Next to banks, IT stocks have a weight of around 17% on the Nifty. If this sector were to slide further then they can counteract the positive impact of financials. Another important area is pharma (down 10% for the year). IT and Pharma are important because there is a huge following for both and people almost have a blind faith in them and now, perceiving them to be of value, are buying into them. It seems logical because a thre-year return in pharma is about 60% while in IT it’s about 92%. Obviously, past memories of great gains would continue to persist.

The problem that this creates is that money gets deployed into these sector as ‘value’ plays and if these fail, then the sentiment gets dampened. Already, sentiment influencing sectors like realty and metals are not really performing. The less said about the small-cap index the better (one year return is negative 10.6%).

Market trends are all about sentiments. If events occur to trip the sentiment, then prices are bound to follow in that direction.

So, what are the levels to look at? Chart 5 shows the Nifty with two pitchfork channels drawn (marked 1 and 2) using different pivots.

Nifty This Week In Technical Charts: Time To Be Wary Of Nervous Nineties

The lower channel of PF1 and the median line of PF2 are placed around 18,250. So that is the stop for short-term players. Ideally, even intermediate term players should have their stops here, since a move below that would break the up moving channel of a long duration. This can then enable a decline to 17,600-17,800 area where the lower channel of the second PF is placed.

This is, of course, with respect to the Nifty spot. Many accompanying events have to occur alongside any price channel breaks. But it is time for us to be ready for such events to appear. For long we have all remained complacent that every dip should be bought into. Maybe that is due for a change? Let’s be wary. If it doesn’t show up, we can always return to the buying!

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.