Nifty This Week: Technical Charts And More – There’s Been A Very Quiet Change In Pattern

We had a pretty dreary week, with first the Nifty failing to live up to the billing we had for it at the end of the previous week – that the chances for continued advances had brightened. Matters were then made worse when prices started drifting, punctuated by a small rally, only to see that fail, and for dips to occur going into the weekend. There was no venom to the decline, mind you, no sharpness in any fall, no adverse news flow, no major events… nothing at all. Just dull drifts from the open that finished lower. As a result, we have, for the first time since April low, five successive days of declines.

This is a change in pattern, for sure. When markets do something that they haven’t done before, then one should sit up and take notice. But did anyone, really? Most of us went about the week as though it was similar to the previous week. An important difference here was that people did the same things, but the market did something different. Anyway, here is the shot of how the week performed.

The question is, why have most of us not changed tracks, shorted the market, made some money, got out of some stocks, etc.? It is mainly owing to the expectations of a new high that we all carry. All of us live in a world of expectations. There’s obviously, nothing wrong with having expectations, they make up most of our normal lives, after all. However, there is a small difference when participating in the market. We don’t just allow ‘expectations’ to remain just that. Instead, we tend to wrap those expectations into neat little packets of forecasts. We are always forecasting our expectations to happen, sooner rather than later.

The main difference between expectations and forecasts is the preciseness of time. Expectations are general, like... the market will go up; the Nifty will cross 16,000; the next dip is a buying opportunity. But forecasts are precise with a time element attached, like... the market will go up in the next week and cross 16,000 too. Now you are putting a time and price level on your expectation. With that kind of precision now built into it, you are now under pressure to be correct. You see, with expectations you can get by but with forecasts, you cannot.

And therein hangeth the tale, as the cliché goes. Whether it is intraday trade or multiple days, we are all into forecasting. We say stuff like, ‘Oh, the SGX is up, so today ought to be a bullish day, so I think I will buy some stocks’. You do so, but there is no movement. By the end of the day, you are forced to square, either because you have no margins or because you are not too sure about what tomorrow may bring. The entire past week went like that for most people, I would presume. You are not able to short options like in the past because the implied volatility is so low that one is afraid to be caught in any IV-squeeze.

How long can this go on? No one quite knows that yet. Will the preponderance of liquidity prevail, as it has been doing for quite some time now? Or will the changed pattern mentioned earlier, along with a consistency of FII selling and a general absence of good news, trigger some more of a fall? No answers to that either. When confusion reigns, it is all guesswork. Looking at the intra-day chart shown earlier, there is a clear lower top and bottom. But as also discussed, even the last swing low is not lost. So the pattern is for the very short-term and will need to make progress to convert into something bigger.

Let’s see if we can build some expectations and make some forecasts basis what we have with us now in the next higher time frame. The following chart shows the daily Nifty futures.

We find the aforementioned five successive-day decline as well as a break of the short-term support trendline.

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.

Now, that is all data. What are the expectations? If a directional change occurs, the correction may extend. If this doesn’t happen, then we can expect the rise to continue. Next, the forecast. If prices do their bearish bit, then we calculate the next support level and make a forecast for a decline into those levels in the week ahead. If, however, they hold on to the current level, move up past 15,850, then we can forecast for possible new highs in the next week or two.

So, for the week ahead, we are left waiting for certain things to happen that may change our short-term expectations and then take the forecast that goes along with it. But remember this; we can always get by with expectations. However, forecasts are trickier things. They can go right (in which case you will have to plan profit-taking, stop revision, position adjustment, etc.) or wrong (in which case you will have to plan differently like setting stops, judging the longer term, checking the financial impact of the stops, etc.). Forecasts, when you make them, always need action. Expectations can be held while watching the European football championships which are currently underway.

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. Trust everyone shall take it that way.

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.