Nifty This Week: Technical Charts And More – Gear Up For Ranged Index, Stock-Specific Action

The budget came. And it went. That is about all that one can say about it. Whatever had to happen, happened ahead of the event. We had a nice 800-point rally from the January lows that carried towards the resistance posed by the January series volume-weighted average price near 16,700. There it seems to have halted. Now we are on to that old Ajit joke – the growth budget won’t allow it to go down while the bond markets will not allow it to go up.Now one may wonder what is this bond market business all about. Well, all markets are interconnected in some way or the other. Usually, not many in India—particularly retail equity traders—worry about the bonds but professionals certainly do. What the budget did, with its large borrowing plan and no mention of India being included in a global bond index, etc. sent bond prices scampering. The yields shot up as a result, reaching multi-month highs. Rising yields always tend to spook equities and many of us may have read about this aspect in the United States but not much in India. But this time around, the reaction was immediate and substantial as bond prices fell. The first chart shows the correlation between 10-year bond prices and the Nifty..It is not exactly a high correlation but loosely so. However, the sharpness of the movement seems to have caught the equity markets a bit off guard. And it stalled. A chart with pitchfork definition of the moves, as shown next chart, indicates the possibility of some continued ranging action. The lower channel of the pitchfork ought to provide support during dips. That runs from 17,000 upwards for this week. Hence, for those who have pending longs and want to move stops higher that should be the nearest level. There are many reasons why someone may want to move the stops closer. Here are a few:.Earnings season may slow down and what has come out so far, although nothing poor, has not exactly lit up the street.The main event (budget) is over and though it looks promising, the market response has been tepid so far.The U.S. Federal Reserve has said what it wants to say and now the markets there are readjusting to a possibility of the taper and rate hikes, etc.Technology stocks in the U.S. are getting pressured and that may temper the buoyant feelings here.Foreign investors don’t seem to have eased off yet on their selling.State elections are nearing and noise related to that is rising..And so on..One of the other concerns some people have is that the U.S. markets are showing some divergence between the Dow Jones Industrial Average (the top 30 stocks) and the Russell 2000 (the smallcap index). The breakdown in the latter is being taken as a warning that the trends in the Dow may be done. Using a similar correlation here between Nifty 50 and CNX 500 we don’t find any problems at all as both indices are still performing in good sync with one another. The third chart shows three indices: Smallcap 250, Midcap 150, and the Nifty 50. It shows that the broader markets are still outshining the main indices yet. So no worries there it seems..The very fact that the Smallcap 250 is still flourishing is a clear indicator that retail money continues to flow into the markets..So long as that is so, the liquidity drive shall continue and FPI selling is being countered rather well by DII (domestic institutional investor) buying anyway..The rising retail participation and its impact was rather well illustrated by a data table I came across in the Business Standard newspaper, capturing the growth in market cap and turnovers..We can note the sharp increase in Securities Transaction Tax collections and rise in market cap over the last five-six years. What is more telling is the fact that the derivative market turnover has simply zoomed. That shows a new trading culture has taken hold in the country and this wave is unlikely to be reversed. While there shall always be some pockets of exuberance, the situation is far from a blowout high under formation, like it was back in 2008. Coming back to the matter of what to expect for the markets ahead, I've already stated that the growth-oriented budget will not allow the market to fall by much. There can be consolidations as markets move into some limited corporate news environment, and volatility can continue because of global news and events and local noise from state elections. This is not exactly the most conducive environment to produce advances. One of the ways that can be cast aside is if FPIs either stop selling or better yet, start buying. Valuations have not really changed much for many stocks but perhaps the market may now start looking at what areas, post Q3 results, valuations appear to have become more attractive. Thus we may shift into a very stock-specific mode in the coming months..This can lead to the index stalling a bit and eking out a triangle or complex correction module. So index traders may find it tough but options guys may revel..So, time to tread with some alertness, with eyes open for where the market takes interest and for us to follow it there. Bearish commentaries that ran over the last many weeks are beating a retreat so dips can be bought into. Activity may reduce so we also should do likewise and be on a defensive set-up..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.

Nifty This Week: Technical Charts And More – Gear Up For Ranged Index, Stock-Specific Action

The market is like that Ajit joke – the growth budget won’t allow it to go down while the bond markets will not allow it to go up.

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