Nifty This Week: Technical Charts And More – Shape The Market Future, Inaction Will Hurt

For a hard-core trader, there were still pockets where some action was available. But there are some misgivings at the same time and these emanate from the daily charts. Readers might recall last week’s article where I pointed to some possible change in the pattern when there were five successive lower candles. But, before we could even take notice of it, the index did a rapid about-face, headed higher swiftly in a couple of sessions, punched out a new high, and dropped off from there as swiftly. Now all these to-and-fro motions of the index have created a bit of a messy picture which one can take find in the next chart.

Sustained sideways price action is immediately visible. The movement also lends itself to some lines to be drawn to the price action. Some may call it a diamond pattern, a bit of a lopsided one. I don’t want to rule it out because a diamond is a pattern that shows up at the top of an advance. The middle leg is not long enough to make it a classic diamond. But for now, we shall proceed as though it is one. Why? Because we had already been warned a bit in the last week and the new high was almost only a glimmer before prices got beaten down. So, when a pattern of this sort appears, we don’t want to make the mistake of being caught unawares if it shows its impact.

We can continue to keep the last big swing low (15,465 of June 18) as the level to break to confirm a change in status.

But if you look beyond the Nifty, you do not find any reflection of bearishness. In fact, the MidSmallcap 400 Index where the retail traders reside is seen punching new highs on the weekly chart. The other two favourite sectors for the market are metals and pharma and here too there is no real evidence of bearishness. The other sector indices are middling.

So, it may be a bit difficult to make a prediction of a reversal based on limited evidence. As it is, like we discussed the question of expectations and forecasts last week, predictions are fraught with some additional problems because they are dependent on a lot of events outside your control. So what one can do is to ‘create’. The question that looms immediately is, create what? The answer is, create a plausible scenario for the future, annotate those with boundaries that shall increase or decrease the probabilities of the scenario playing out, and then watch the progress, as the future unfolds in real-time.

Really speaking, when you make a forecast, you are actually not predicting but trying to ‘shape’ the future. Predictions just become guesses.

If an analyst has to just guess, then what good can come of it? So, let’s use the data we have to shape a plausible scenario that can play out.

First, it can really be a Diamond Pattern. We have already stated that a break below 15,465, the last swing low, will set the ball rolling on the downside.

Next, we can keep track of sector indices during the week, especially those sectors that are highly patronised by retail. Why the focus on retail? Because it is the retail money that is really driving the current trends.

Third, we should be ready with some bigger picture if something untoward happens. Take a look at the next chart which shows the Nifty with Ichimoku setup.

What we see here are two circles and an arrow. One circle is the current price that is at the level of the Tenkan Sen or turning line, a good level of support; the second circle is of the Chikou Span or lagging line which is now entangling with the prices. The first shows that if prices go lower then there shall be a trend break. The second suggests the possibility of a lot of ranging action ahead. The arrow showed points to the cloud beneath, implying that if the prices break below the TS line then there is some ground to be lost before supports can be hit. The cloud is a thick one so fall will be arrested or slowed down in case it is reached.

This prepares us to look in the right direction. Is the price giving way? If it does then we may have a fall that can stretch till the cloud (a few hundred points away). So that means get ready for dips. However, if the price doesn’t break, then the CS line warns of some ranging. This means a continuation of the current spell of aimless meandering. So drop expectations about trends.

That is if one is playing the short-term. We can also shape expectations if one is playing longer-term using the same set of signals. Since the major trend is as yet undisturbed, a longer-term player ought to be looking to buy. For him or her, the break of the TS line levels will provide an upcoming opportunity. Then they can be ready for a buy near the cloud levels if approached.

We did something similar last week too. We told ourselves that if prices went below the bullish candle of June 21, we would have to prepare for more declines. It didn’t. So we had no need for bearish strategies. This was not a prediction or forecast. It was just shaping what can happen in the future and becoming ready for it. Here was some more ‘shaping’ that we gave to the future in the last article:

“We find the aforementioned five successive-day decline as well as a break of the short-term support trendline. Since we made a higher high after the last swing low at 15,455 on June 18, we need to build a fresh lower top, lower bottom pattern to set off trend-change signals. The break of the trendline is a warning. Now, see the small rectangle that has been drawn encompassing the bullish candle range of June 21. This is the counterattack of the bulls. Now, if this zone is compromised, then you can conclude that the bears mean more of a business this time. Now the rise to a new high happened in six sessions after the June 18 low. If we retrace that in lesser time (i.e. less than six days, of which four are over as of Friday) then we will have a signal of a change in direction or the swing (but not the trend, please note). This needs to, therefore, happen by Tuesday next week. If later, then it shall be a small change in only the swing.”

In that article, I also wrote, “This article is primarily about forecasts and hence can be correct or even completely wrong. We use certain parameters to first build arguments for an expectation, then define contours around that logic to create a forecast and offer caveats that shall prove the forecast either right or wrong.”

This is primarily what I am reiterating for this week – that we don’t predict the future. Instead, we try to shape it. If you think it along these lines, then you will always be ready for action. An inability to act, when demanded, is the main reason for failures. In the markets, we keep meeting with failures. The way to approach it is to think about how we can prevent failures. If they cannot be prevented, then how do we recover from them? By shaping the plausible future we give it actionable contours. Once we do that we need never have a fear of failure, because we will always have a way of recovering from that.

When our shaping comes out correct, we know we are on the right path. Once you have identified what is happening, you can then go fast, because you are now prepared for it. Shaping the future allows us to always maintain a bias towards acting. That is the way to minimise losses and maximise gains in the market.

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