Nifty This Week: Technical Charts And More – Why Ranging ‘May’ Persist

There was no respite in the week just ended. We almost had a mirror image of the trading pattern of the last week as the market continued to grind away in a range but with pronounced volatility. The first chart, as ever, captures the moves as they unfolded during recent weeks. The intra-week moves of the last two weeks have been highlighted and one can see how choppy the market has been, making it quite, quite difficult for traders to make any money. Notice, also, the number of gaps that the index showed during these two weeks. These just made matters worse.

The chart also captures the overall moves of the past four weeks as one sustained decline followed by sustained sideways action. The problem is that it takes at least a couple of days of market moves before it registers in the minds of most market players as to what the trend is. Just as people were thinking prices would go lower, they turned right around and then moved into a sideways phase.

Such swift changes in direction become quite tough for most people to handle. We are not designed to think and change our minds so swiftly. As a result, such times always manage to catch us on the wrong foot.

We have been tracking the market’s next higher level using the Schiff pitchfork on the daily charts. Continuing with the update of the recent action on this chart, we are now finding oscillations around the Median line. Once again, this is reaffirming the uncertainty of the current trend and it is difficult to have a view on such price action. The second chart is an update on the same, this time with the ADX also added to the chart.

We had already seen last week (using the weekly chart) that the momentum on the rise was limited. In fact, I had written in last week’s column, “... (the RSI) shows a tendency now towards the neutral and possibly points to some ranging action ahead.” That is pretty much what we got in recent weeks - sustained ranging. Sentiment too was defined as being tenuous and therefore vulnerable to declines if adverse news was to appear.

When we started the week on April 25, it was on an ominous note – a wide gap down and a weak close. But somehow, the trend muddled through those tricky waters to stay afloat and finish the week somewhat neutral. See the second chart.

I have added the directional movement index indicator this time, to check the trend status. Choppiness is once again being signaled as the two directional-indicator lines are seen crisscrossing one another near the neutral zone while the ADX line has moved to low levels and resting flat. All these show a total absence of a trend, and hence it would be foolish to read anything into some market swings that happen during the week.

Only something sustained, that can succeed in pulling apart the DI lines and force the ADX line into an ascent, shall become meaningful.

This should have been a decent time for option sellers. Of course, they too would have been troubled by the opening gaps and higher volatility, but overall it was a ranging time, and with Implied Volatility sedate around 17-18%, writers should have had a better time. It is directional option players who may have faced considerable difficulty as choppiness makes mincemeat of trends.

Nifty Alpha 50

I have often in the past made reference to the Nifty Alpha 50 Index as a good indicator of the adventurous mood of the market. It is composed of stocks that consistently outperform the overall trends in the market. I have featured the same in the third chart and one can note that the long-term trend line in the index had to be revised because the prices ran up and made a new high after the correction in the earlier part of this year.

So, even as the rest of the market remained under pressure, there were several stocks (worthy of being included in an index) that were faring very well, enough to carry the Alpha 50 to an all-time new high in April 2022.

Added in the lower panel of the chart is a relative strength comparative of the Alpha 50 with the Nifty 500 Index. It can be noted that the Alpha 50 has been hugely outperforming the Nifty 500 for the past two years. Dips have been there every now and then, but only to pull back higher yet again. The horizontal line marked on this chart defines the three troughs seen so far (including the current one). Ideally, the market should find its feet here if the trend status is strong.

However, a violation of this trough definition might signal something different – that alpha-producing stocks from across the market are now finding it tough to continue their earlier behavior.

That would signal a change in the behavioral status of the market and would be something noteworthy because it would signal that the hitherto outperforming stocks are no longer able to. That would be a big change.

Meanwhile, because many sector indices have hit support zones during the decline of the last 3-4 months, there is some hope about their prospects, were the market to make an attempt to improve from here. However, that is not the case with the IT index, where such support (provided by the moving average bands) is yet to be reached, as can be seen in the fourth chart. Also note in this chart that the weekly RSI of the IT index is seen breaching the 40 levels too. Not too healthy a signal, that one.

Quarterly results have been flowing and they have been a bit mixed.

Of the about 200 companies that have announced results, about 60% have seen profit growth while about 35% have seen profit decline. Not too bad, but certainly not something that can light up the street yet. The sentiment has been a bit dull, and even some leader stocks (like ICICI Bank) with very good numbers have not been able to ignite bullishness in the sector. By the end of next week, we should have a much better handle on this matter.

Looking ahead and making some forecasts based on time cycles, it appears to me that the outlook for May is not so hot. The chances are that rallies in the market will get sold into, and only stocks with some big street-beating numbers may be able to buck the trend. Hence, it may be prudent to be on the defensive during this month and caution oneself not to get carried away when some rallies occur.

At the turn of the month, the option position seems to suggest some ranging action too.

On the lower side, 16,800 continues to show as a good support zone on the Nifty and hence bearish considerations should be entertained only if prices break these levels. Given the earlier observation on time- and price-cycles it would also be prudent to be alert for such possibilities.

On the higher side, 17,500-17,700 would need to be exceeded, and that too with some gusto for us to take up long positions of durable nature. Until then, keep it all short-term oriented, enter on pullbacks than on breakouts, and make sure to take money off the table when you see some.

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.