Nifty This Week — Technical Charts And More: After This Fall, The Crucial Chart To Watch

Those that paid attention to this would not have rushed in to buy as soon as the market bounced on Tuesday after a weak resumption on Monday. The trends suffered a rout once again in the week just ended and dropped further, losing a further 4.5% over this week also. Totally, we have now dropped about 8.2% from the mid-October high. That has now exceeded the ground lost back in the February-April 2021 correction. Since this has occurred in lesser time compared to the earlier one, based on the principle of overbalance of price and time, the swing has turned down.

There is another area from where this signal is also emerging and that is the Heiken Ashi candle chart. The first chart shows the week set up. We can note that the trend, according to this style of charting changed in the last week.

Observe that the red candle appeared after four weeks of small body candles. So it is that the market thought about what was going on for four weeks and then decided to go lower. This was being signalled earlier too and that is why I wrote last week that we were at an inflection point. The candle body is sizable enough to merit consideration and also the shadow is to the downside implying more declines ahead.

The same chart also carries the long-term support trendline and right now the prices have come down to rest on this trendline (coming from the March 2020 low). Such a long support trendline—tested a few times too—is not to be treated lightly. We must give benefit to it working rather than breaking.

In addition, I have also overlaid on the chart the Fibonacci retracement of the last leg of advance and we can note that the dip of last week brought prices down to the 50% retracement zone although the closing a bit off that level. Prices are down to the 17,000 levels where, typically, round figure psychology should manifest and option short positions are built.

So, once again, the question arises, will this be enough? Can it do the trick for the bulls? The answer lies not in there but, perhaps, overseas. The real culprit of this fall has been the consistent selling by foreign institutional investors. No doubt the domestic institutions did put up some purchasing but the consistency has been a bit much for them too. Earlier, most of the selling was absorbed as retail money was supportive, buying large-cap stocks and funnelling money into mutual funds. But in the last few weeks, the shower of IPOs and with some super listings, the money has been diverted towards that area and playing them after they are listed too. Also, another big interest area has been the unlisted equity space. Then, of course, not to mention the role of crypto, which has sucked in the younger set and taken some of their money away from the equity markets.

So, a variety of factors are probably responsible for the fall.

The Dollar Index was on a good wicket and continues to look positive. Here is a chart of the DXY versus the Nifty. We can see that the usual inverse correlation (missing for a small while) has kicked in strongly. The next chart shows this relation. Broadly, it is seen that when the Dollar is strong or the Rupee is weak, the market tends to decline.

This is also the first serious correction that newbie traders and investors have witnessed. So, many of them may not know what to do. They have all been used to the market reviving swiftly or not going down by much. Hence this correction would be a bit perplexing for them. For sure, they would have done the same thing they did last time, which is, keep buying the dips. This time the market has not obliged. Yet. But this time around they may probably have moved their attention to the recently-listed stocks that have fared rather well.

A look at the different segments of the market shows us a picture of contrast.

It is evident that the small- and mid-cap space has fared better than the frontline indices. Evidently, retail trade averted a rout by concentrating on an area that actually witnessed some buying, it seems. So their sentiments may not be as roiled as the big 1,500-point fall in the index may reveal.

But when looking at the near term the two most important elements are Volatility and Momentum. Here is a chart of India VIX. As can be seen in the table, there is a big gain in the VIX readings but much of that came on Friday. The next chart shows the gains.

That is not a good-looking chart for bulls at all. It is not as though such upward spikes have not been there earlier. But they have not turned more threatening only because the markets made amends almost immediately in the following week. So, that is the main event to watch in the coming week. Can the market right itself and send the VIX down once again to its quiescent self? Options traders do watch the VIX but it is time for normal traders to do so as well in the coming week. That will be our first cue about what to expect further into the week.

The second is momentum. Using the RSI, I find that the current down move is being accompanied by the RSI on the daily charts. So there is scope to continue lower as divergence patterns have not clicked in yet. But they are being hinted at in the 60-minute charts. In the weekly charts, the RSI is still comfortable, still perched in the overbought zone.

The third is support-resistance. The first chart showed the Fibonacci retracement and the prices were down into the 50% level. If declines continue then the 62% would be next and that lies at 16,685. That would be the next zone where we may get some consensus. Good trends will, ideally, not break the 62% pullback zone. Hence that could be the lower-end we may look at as a worst-case for now. If it does, then a deeper correction will be signalled.

We were at an inflection point last week. But that has now been resolved to the downside. Now the issue is one of whether the movement shall continue down further or now. As ever, we wait for the market to signal us its intent. But we create the milestones that shall tell us the market’s intent ahead. Those are in the form of VIX (not to expand further), momentum (not to power prices lower), and support (to hold declining attempts). If those milestones work, then we may have a reversal at hand. If not, then a drop into the next support as mentioned.

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.