Nifty This Week: Technical Charts And More – A Short-Term Inflection Point

Over the first couple of days, the market trudged higher to put in a new all-time high and then slid from the peak, gathering speed towards the end of the week. We finished slightly off the lows. While that rally in the second half of Friday was indeed a relief, we cannot rejoice yet thinking that the worst is over. It is only PSU bank chairmen who keep saying every quarter that the worst is behind them when it rarely is. Were a trader to look at things that way, he or she could have any trading long/short positions on, that could end up bleeding a lot from all that is going on in the market.

Here is a snapshot of the week's trading.

The chart shows the progress through the week as well as a small picture of the daily chart inside it.

I've chosen to depict a daily candlestick within the intraday to highlight the fact that the rally from the low has produced a nice lower shadow candle for the day.

Why is this important?

For the past month or so, every dip is getting bought into and the candle patterns are creating lower shadows.

Was Friday more of the same?

Possibly, if prices show follow-through action upward when we resume trade on Monday.

It also highlights that the Nifty broke through the small consolidation low near 15,600 (headed down to 15,465 for the low) but managed to recapture the territory above that level.

Is that significant?

It could well be, if the higher levels are not held in the coming week.

What may perhaps come to the rescue could be the intermediate support trendline extending from the April bottoms. The Friday dip was right into this trendline and the fact that the prices bounced nicely off that could give some hope to bulls. The bulls are still very much around, the lower shadow candle on Friday confirms it. Friday’s pullback would also have taken the bears out as they would have been forced to square up with the weekend looming.

You may ask why am I concentrating so much on what happened on Friday? The answer should not be far to find.

Recall that for the last two weeks, I had been highlighting that we are getting into a price and time window where a larger reaction can unfold. Well, it was right on cue. The decline started from June 16 (projected turn date was June 17) and it also broke through (but didn’t close below) the 15,600 level.

Now, that is significant because when price reactions do not break prior minor lows, the strength of the trend is high. So, now a break of 15,600 actually constitutes such an occurrence. Market analysis is all about pattern identification and stringing them together to make a larger composite pattern. This is how you arrive at a forecast. We used some price and time studies, made them into patterns, strung them together to form a view that we could see some reaction set in from mid-June. Now that we have one pattern coming up—all right, half a pattern since it closed above 15,600—we need to pay more attention to see if there are more patterns.

Well, here are a couple more, in this chart.

Two oscillators are provided, the Relative Strength Index and Directional Movement Index. We see divergence having occurred in the RSI which is now getting ready to break the overbought zone. The directional indicator lines have crossed negative. If you wish to nitpick, the RSI could show a positive reversal, the DI line is far from having established any fresh ground, the support trendline is not broken, etc. Okay, granted. But will that happen? Maybe the hourly chart may provide some evidence. Take a look.

Prices have accelerated a bit to the downside, breaking prior swing lows decisively in the hourly chart. The negative DI line is very clearly in dominance here and has been so since June 9. The RSI has slipped into a bearish range and shows no divergence at the Friday lows. The conclusion to be drawn from the hourly chart is that the bears have come past the door and are in the room, at the minimum.

If you take all these signals in the light of the larger-degree signal of a price and time match then it is certainly time to take matters more seriously.

Of course, all these become infructuous if prices continue higher, past 15,750 and then 15,840 in the next week. That is really the level to watch for the week ahead if you are a bull.

If you are a bear, you are watching the support trendline to give way. Once that occurs, the negative signals on the oscillators get a green signal.

There is no meaningful time-count indicating upward in the rest of June. Remember what was said in the article three weeks back: “Using some time cycles, I mark the high for the month to be around the third week and hence the ending could be off the highs. This has important implications for option traders”.

The mid-month high was therefore right on cue. Hence, I don’t expect any big rally unless some big external trigger appears from overseas.

At the start of May, we studied the monthly and quarterly ranges. A month later, the article at the start of June noted: “The quarterly range is already at around 1,355 points as of this week. Assuming that June punches out further new highs, the quarterly range of the Nifty shall also expand. This may, kind of, limit the extent of June gains and that too is something to keep in mind.”

The strong moves in May followed by new highs pushed the quarterly range to around 1,755 points, well toward the higher end of the range for yet another quarter. It seems unlikely that higher-highs may now occur in the balance of June to extend the quarterly range. The monthly range for June is 444 points so far (created in just the last three sessions). So, the chances of a range expansion could be more to the downside rather than to the upside. That is one more reason to be careful about how the market trades in the next week.

There’s more stuff like this but it would just be a reiteration of the same point, so I won’t overload readers with more technical stats.

The last two articles had warned readers to stay ready for a change. I trust that prepared them to be cautious. Now this week, I am reiterating the point that a turn may be at hand and action is called for by short-term players.

What about the longer-term guys?

I think even that bunch should have a working stop for part profit-booking if the Friday lows break. The 25-week exponential moving average is at 14,565. That is 1,000-points lower. It is damaging for any kind of player. The biggest grief in the market is to see the market take your profits away, even if only some. The big swing low to break is 14,155 (April low). For a trend reversal, this low needs to be broken in less than six weeks from now. That means quite a bit of a wait. If you are a true long-term player, then you should wait for that event to occur – for at least a change in direction signal, if not a change in trend signal. If you are not willing to do that, realise that you are really not a long-term player.

So, decide what kind of play are you making in this market and then decide which are the levels and signals you wish to follow.

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.