Nifty This Week: Technical Charts And More – Watch The VIX And Banks For Some Clues

My suggestion to readers in last weekend’s column was to play a bit on the back foot. That advice would probably have turned out to be okay because the market remained quite range bound and very, very stock specific as well. Even there, moves in the stock (or the indices) were quite curtailed. So the ranged action expected was on target. At the end of the week it continues to appear like we are headed for further truncation in movements and in all probability, the ranging may continue in the next week.The main event for the week was the Reserve Bank of India's monetary policy announcement. Like the budget, it came and it went. And did nothing much. Of course, the papers called it a surprise (that the RBI did nothing) but the consensus in the market was that the RBI would do nothing. So, the only surprised guys were perhaps the journalists. The pathway of the week was an aimless meander as can be seen in the first chart, below..The trendline seen below the prices is the near-term support line and that is placed at 17,150 levels for the week ahead. So, if prices dip into that and reverse, it will be yet another higher bottom from the Dec. 20 low..In last week's column I had also mentioned that one may want to move up trading stop-loss levels to near the 17,000 mark, citing a few reasons. Most of those reasons are still valid. For example, the U.S. treasury yields shot above 2% for the first time since the late-1980s. Now that is quite something. Everyone there is making a huge hue and cry about possibly rising rates but I would have thought it to be a normal consequence of a multi-decade rise in inflation rates and nil rise in interest. The American markets caught a flu as inflation numbers came in higher and the bond yields surged. Our own RBI was a lot more sanguine and left rates untouched. Nothing out of the ordinary considering that our inflation has been a lot more sedate and the governor's commentary displayed no particular nervousness. So, the market took it in its stride and sought some higher levels briefly. But many times, world markets sneeze along with the U.S. for no reason because everyone is fearful of Big Sam..When markets go into ‘no-reason mode’, then it is always better to play with stops..The way stocks have been reluctant to move higher on good earnings is a clear indication that prices had moved ahead of the numbers and hence the catch-up effect was evident in many sectors. Scores of IT, FMCG, pharma (API) leaders were all seen down between 15-40% despite good numbers and people unfamiliar with this aspect of the market were left scratching their heads. In some sectors, particularly IT, the run-up had been so substantial that even after a decline, matters still appear to be dicey. When this kind of run-up happens, the stocks become susceptible to earnings disappointments.The stop-loss on trading longs has not moved much from the last week owing to the largely sideways price action that has occurred. The second chart shows the pitchfork used last week and updated this week..As can be seen, the stop at the lower channel is still around the 17,000 levels..Looking at trends in the short term, the run-up of the week gone by was within a limited price cycle distance and if the Nifty were to fall beneath 17,270 in the week ahead, we may see some continuation towards the pitchfork support. To stay aloft and give the bulls a better shot at moving markets higher, the Nifty needs to be pushed and held above 17,500. Not too difficult for either side to break the levels. So we need to watch and proceed.Two weeks ago, writing about FPI holdings in Index futures, I had mentioned that short-covering itself could be one of the reasons to produce a rally. Well, as of the week just ended, the data shows that FIIs have been brisk in covering their shorts..Shorts are down to 69,000 vs. 1 lakh+ while the Longs are now at 52% vs. 35% earlier..In the last week, they have been net long. So, the expected is happening. But once parity of sorts is restored between shorts and longs, the moves stop, until some new reason emerges. We are probably near those points and hence the slowing of the trend and the tendency towards continued ranging. The India VIX has also dropped and we can note in the next chart that a support trendline on the daily VIX chart is set to break if levels drop below 17 ahead. It may be something to watch, as this may signal a better bullish environment getting created. Right now, the fear element can only be said to be receding and not completely gone..One of the notable features of the last week was also the perking up of some banking stocks. If IT, FMCG, etc. are not firing then the index can be supported only by banks, the sentiments can be saved by metals (also up nicely during the week), and levels taken up by Reliance Industries (looked up mildly). Of interest in that context is the Bank Nifty to Nifty 50 ratio chart, shown in the final chart below, that continues to tick up, hinting at the possibility that banks may remain in play ahead and one should probably concentrate on those for signals..Summing up, the market is into consolidation mode owing to various triggers that are counteracting each other. Hence the range bound action expected to continue. At the same time, since there is a likelihood of overseas news triggers tripping sentiments here, we need to maintain a stop-loss on trading longs and this is fixed at around 17,000 levels. The longer-term is not disturbed yet in any manner and the budget and the RBI’s no-action policy only buttress this view and therefore longer-term players can wait for actual signals of a change in trend before acting. A shift in sector preferences seems to be happening and one may keep an eye on the banking sector to see if it is able to work up enthusiasm among the bulls. The VIX dropping further will be another beneficial factor for bulls and that needs to be watched as well..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 – Watch The VIX And Banks For Some Clues

A shift in sector preferences seems to be happening. Keep an eye on the banking sector to see if it is able to work up enthusiasm.

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