Nifty Technicals: 2022 Outlook, In Charts

Why the first quarter of 2022 holds the key to the market trends for the rest of the year. By CK Narayan.

<div class="paragraphs"><p>A pedestrian wearing a protective mask is reflected in an electronic stock board outside a securities firm, on Jan. 4, 2021. (Photographer: Noriko Hayashi/Bloomberg)</p></div>
A pedestrian wearing a protective mask is reflected in an electronic stock board outside a securities firm, on Jan. 4, 2021. (Photographer: Noriko Hayashi/Bloomberg)

It is that time of the year when everyone dusts off the crystal ball and does some intense gazing into the future, trying to foretell what the New Year shall bring. But as the saying goes, we need to know where we are to know where we need to go. So the first thing to do before looking into 2022, is to take stock of what happened in 2021 and how it is going to impact what is to come ahead.

Where The Markets Stand

Undoubtedly, 2021 has been one of the best years for those in the markets. It has been particularly great for all those who entered the markets in the last 18 months, for, they have seen only a strong bullish trend. For many, dreams have come true (one guy in Nashik even named his newly built house Share Market chi kripa) and for many other old-timers, the rapid revival in their portfolio values has certainly been a source of joy. The values had taken a dive after 2018 and by 2020 the beating was pretty severe. Many quit the market during that time, believing that the pandemic would run riot.

But to everyone’s complete surprise, the last 18 months witnessed an astounding rally, in India and across the world. India has been one of the top performers and even though the Nifty has doubled (and more) from the lows seen in March 2020, corporate earnings have managed to catch up and hence valuations didn't seem so stretched.

This has had two ramifications. For the new entrants, the going has been mostly great. The older players, steeped in history and expecting the market to be ‘normal’ at some time or the other and pull lower, have been disappointed to some extent as they kept liquidating some of their holdings ‘to play it safe’ as they put it. However, each of those ‘play safe’ decisions blew up in their faces and the market kept moving higher until October 2021 where it clocked a high near 18,600 levels.

By that time, of course, some complacency had set in—particularly among the new set—and people missed the meaningful correction of close to 12%, with small-caps dropping by nearly 18%. This was the ‘I told you so’ moment for the old-timers, while it was the first jarring experience for new entrants. Yet those that had entered earlier continued to see it as a correction to buy into and hence the liquidation has been quite limited, ensuring that the trends didn’t really collapse around any of us. Here, I can’t resist an ‘I told you’ moment of my own. Writing these columns in October, I had made a statement that the high of that month will not be exceeded till the end of the year. So far so good.

Now, of course, the big question is whether the 12% fall from the high has threatened the uptrend.

There are many calls for declines or consolidation ahead. Many point the finger at the foreign investor selling and tout the big outflow numbers reported. But I read a contesting view that the picture is not as bad and if one adds in the foreign money that flowed into the IPO markets, then it appears that FIIs are net positive for the year.

So, the notion that FII selling was roiling the trends and that would lead to some major declines, appears to be a bit of a bogey.

If the fall is not a complete change in trend, then we need more evidence to point towards that, right?

Let’s use a simple technical indicator and some common sense. Trends do get overheated every now and then. This is usually accompanied by some rapid price action as they move briskly away from the mean. We can use a simple indicator like a moving average or something even simpler like a trend line.

So, I dug into the past and measured some major market peaks and the distance they were away from the main support trendline at that point in time. The table below shows this data.

Nifty Technicals: 2022 Outlook, In Charts

Here are some sample charts from the years to illustrate the point.

Nifty Technicals: 2022 Outlook, In Charts
Nifty Technicals: 2022 Outlook, In Charts

Between 2010 and 2020, there were many swing highs but none of them showed any serious move away from the support trendline.

The important element of the entire advance for a decade was that all bottoms made noticeable higher bottoms and many of the pullbacks never broke the support trend line.

Therefore none of the corrective falls after the various peaks, in 2015, 2016, and twice in 2018, really saw any significant decline. It was only in 2020 we saw a sharp cut and a break of the trend line quite decisively.

The rise from the 2020 low saw three peaks from where we got some pullbacks, none of which broke the new support trendline, and the most recent one was only 9% from the trendline.

Nifty Technicals: 2022 Outlook, In Charts
Nifty Technicals: 2022 Outlook, In Charts

So, now you have something that seems more concrete. Big reversals occur from highly overbought levels characterised by prices being far away from the support trend line. This is caused by prices going into overdrive in a short period of time. The most recent episode of October 2021 saw the index only 9% away from the support trend line. If we look at the various peaks through the years, then this is among the lowest.

Hence it would be easy to draw the conclusion that the high of October 2021 was not a major one, which would then make the recent pullback part of a correction within a larger unfolding bullish impulse.

Where Markets May Head Next

So, now we roll ahead into 2022 and start our forecasting. To do that we try to join more dots to see if we can come up with some patterns. Humans, in general, think in patterns and their actions are based on patterns too.

When you think of a year out from today, then essentially, you are talking about some time cycles. Price cycles are subject to time cycles. It is the price that forms patterns. It is events around prices that suggest a pattern. Identifying those patterns—that may change swiftly sometimes—is an art. Cycles however are fixed and repetitive. Patterns create some dynamism around cycles and present them as different every time.

Using long-term patterns and time cycles, here is my long-range forecast:

  1. 2022 will be a bullish year.

  2. The low of the first quarter will be the low for the year.

  3. There would be a mid-year decline (March-June).

  4. The second half will be once again bullish with a top made in November 2022.

Of course, a forecast always comes with caveats. Here it is: If the first-quarter low is broken, the bullish view for a high in November is negated.

I expect a good run in January-February so there should be either some good news from Q3 results or a good budget. If the highs made in February 2022 are crossed, then the bullish year is confirmed.

Hence it emerges that the first quarter of 2022 holds the key to the trends for the rest of the year.

The next chart shows a diagrammatic pathway for the move.

Nifty Technicals: 2022 Outlook, In Charts

Strategising this view shouldn’t be too hard.

Since the bullish view is expected, we have to continue long and add new positions when signaled. The dip in June should form a higher bottom compared to January lows and would present the intra-year buying opportunity.

Here is something from the pattern items that I have used. The next chart is the Nifty EPS through the years. I am using the pattern seen on this data as a guide.

Nifty Technicals: 2022 Outlook, In Charts

Note the way the EPS improves in steps. I have drawn small trendlines at each of the ‘steps’ and we can see that the 2021 figure is a big breakout above the last set of values that had a topping around the 420-450 area.

Note also that every breakout of a step leads to many years of sustained moves. The first breakout was in 2003 and we had a bull market till 2008. Then we had a breakout in 2011 or so and the bull phase ran till 2018.

Now a new EPS breakout has happened in 2021. Going by history, that ought to see some good moves for a few years.

The so-called smart set has spent much of the recent rise exiting their positions and waiting on cash to buy-in. The recent pullback was one such opportunity. Was that used to buy in? I don’t know. FII reallocation may come in the new year, but will it? I don’t know. DIIs may continue to buy, but will they? I don’t know. These are other patterns that we base our projections on.

One thing I do know. And that is that retail money is coming in substantial amounts. And that set is binging on mid- and small-caps. So that is the area I expect to do well in the year ahead.

The tail shall therefore wag the dog this time, I feel.

So, index moves may not be so great but stocks may do very well.

Most of us, trade stocks. So looks like good times are ahead. Being prepared is an important part of spotting opportunities. This is my way of preparing. If it works, great. If it doesn’t, well that is fine too. We will just go on to the next set of patterns.

Analyse. Implement. Rinse. Repeat.

Best wishes to all readers for a prosperous and healthy 2022.

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.