Nifty This Week: Technical Charts And More – A Line In The Sand At 17,400

This picture was the exact reverse of the intraday picture shown last week, where we had a nice finish. But failure to capitalise on that good finish led to the opposite this time, a low finish. If markets end the week poorly, it always creates a pall on the sentiments. Perhaps, the fact that the market is open only for three sessions next week (plus the Muhurat short session) had something to do with it. Perhaps, the fact that a lot of positions had been surrendered at the turn of the month expiry had something to do with it too. Maybe, it was that the results flows didn’t really create much of a sentiment wave had to do with it. Be that is it may, not exactly a thrilling week.

A more telling chart would be this one, the weekly Nifty, since the March 2020 low, as shown in the next chart. The area marked in the middle is where we saw two or more reaction weeks. That was the February- April period.

One can note that we have two successive red candles now, this being a departure from the trends – not more than one red candle for a reaction. So, maybe a repeat of the earlier correction phase? If that happens, it may be a bit tough.

I recall that period as a difficult one to trade and make money. Typically, these phases come on after the market goes through one of those phases when money-making becomes easy. Everyone starts thinking that they have licked it, got the formula right, etc. The sentiment is not too damaged. So prices may continue to hang around near the higher end, just like they did the last time. But then the trends turn so choppy, alternating days of up and down, that it punches a lot of holes in trader’s balance sheets. When you have been used to making money smoothly for a while, this shift in market behaviour makes it difficult to accept.

The next chart shows two sets of retracements applied, one of the nearest swing up (from Oct. 1 low) and the second, a bigger one from July 28 low. Prices have hit the 78.6% retracement of the first, gone to the maximum extent allowable for a retracement of a rise. In the process, prices have cracked below the 23.6% retracement of the bigger leg. In case the prices continue to fall and go below the week’s low at 17,659, then we are looking at the prices doing a bigger retracement. Note on the chart that this comes to around 17,400 levels for a 38% pullback.

Pullbacks in strong trends generally hold at these levels and resume the trend. So that is the job for the bulls in the coming week. Halt the slide here and take the Nifty higher. If they don’t, then matters get a bit dicey and we may have to start considering larger pullbacks.

For looking at trends, one of my favourite tools is the Ichimoku chart. So applying the same to the daily chart of the Nifty, here is what we find. See the next chart.

Prices are below the Tenkan Sen and Kijun lines, so the short-term trend is broken. But not so badly off because the TS is still trading above the KS, so all is not lost yet. The cloud beneath is a bit near (17,400) and far (16,775). That gives us an idea of how far prices can fall. But at the same time, the Chikou Span line is getting into the prices and that signals possibilities of the range ahead. Given that as evidence, the prices may perhaps not fall much below 17,400 (i.e. the top of the cloud). In the earlier chart, we can note that the prior swing low, the 38% pullback, etc. are also at this level. So that is what I would want to believe at the moment. This is still about 5% below where we are trading and that can cause some damage to stock prices, but hey, that is what corrections do.

Time cycles have November leaning towards being a down month and possibly December too. I would want to watch the high and low of the first week and choose to go with the direction set by the prices after the first week. Not expecting much on the upside so maybe for now the 18,600 area is a top for the balance portion of the year.

If that be the case, then it may be time to change strategies. First may be to take some money off the table in our portfolios and book some profits. Next would be to curb adventure, of assuming that every dip is a blind buy. The third would be to turn selective on purchases and do so after some double-checking of the arguments for buying. Fourth may be to eschew low-quality stuff because those flourish only in active bull markets.

Maybe the caution is not warranted at all, but I would rather err on the side of caution at this juncture rather than against it. We have had a good time and while there is no overt signal of any changes, the line in the sand is now drawn at 17,400. Beyond that, not being sanguine anymore.

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.