Nifty This Week: Technical Charts And More – Warning Shots Fired

Volatility was a feature of the week. That was on tap already as the VIX had ticked up a bit and stayed up despite the index pushing higher. So it was not fear leading to the VIX rising. It seems to have indicated a higher zone of volatility setting in. Typically, this leads to a larger range formation and frequent moves across the range. If the range is large enough, then it becomes tradable. But if it is not, then it causes some nightmares for traders as they become chopped or even diced meat.

From the word go, though, this week carried a downward bias as can be seen in the pathway chart that I feature every week. The damage was limited through the week of course, and we finished better at the end of the week.

The important point was the sequence of price candles from the July low. There has never been a weekly low that has been violated. This week too, the index has been saved those blushes.

As can be seen on the next chart, the last such a long-range bearish candle chart was seen was in January 2021. So, any follow through price action on this would be a change and may need some action from long holders.

Analysing the market on a weekly basis is a tricky thing to convert into successful trading.

Analysis is about anticipating direction and setting the probabilities for it, basis the evidence presented by the market. Converting analysis into trading or investing success demands a few more qualifications from the player. First, it demands that the trader or investor has a clear destination. By this, I don’t just mean an ‘I want to make money’ type of destination. If we all didn’t want to make money, why would we even be in the market? I mean a clearer destination, a better, well-defined one. It can be done and it also needs to be done.

When markets turn volatile, traders have difficulties with the direction. It is at times like these that a clear destination can be of help. For example, if a trader decides that she will take X profits or stake a Y loss amount (per day/per week etc.), then that becomes a destination. Of course, this X or Y has to be set basis the capital available and other factors of trading like access, ease, etc. Once this is set then one can look at direction using that as a lens. In trended markets (like the ones we were having) the X and Y component have to/can be larger. In choppy or volatile markets one has to reduce the size of the X and Y components.

People become creatures of habit in the market.

This is true whether it is the frequency of trades, style of trading, quantity, holding, etc. Once the habit sets in, it becomes difficult to break. A wise man has said, ‘If you want to find a better path you have to be willing to explore a different path’. If you want to benefit more from market trends, then it is time to think about what you are doing currently.

After that brief sermonising, let’s get back to the market. In the last article, I had shown a sharper, short-term trendline. In the week gone by, this trendline was broken, and that too with a fall.

Not that this has not happened earlier. The index has always followed up with a rise that pushes to a new high, thus invalidating the trendline break. We will need to wait for that to occur before drawing conclusions. As of now, there is a hint of weakness that needs further confirmation. The next chart shows the trendline break.

An additional source of worry is the new signal in the momentum chart. In the following chart, one can see the RSI showing divergence and now with the break of the trendline, the pattern gets confirmed. The drop has now carried the RSI level also below the overbought zone.

So, some warning shots were fired during the week.

We have been here before. Will history repeat? It is always better to let the market do the talking than us forcing our views upon it. These are signals for a short-term player. The longer-term guys can still wait some more time as their tripping point is far away at the moment. Nevertheless, time to stop being complacent for now.

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.