Why The Nifty Is Better Positioned For Next Week Than The Bank Nifty

What a relief, said a lot of market men. The four-day rally of the last week certainly restored some confidence as the market raced ahead, seemingly completely shaking off the bearish grip that had taken the market in a hug over the last five weeks and more. It finally culminated on Monday with a Nifty dip below 17,000. Ideally one would have liked to see the index bounce on the same day, but the trend did not tarry too much and picked up well from Tuesday and extended to the end of the week. Traders had an easier time as can be seen in the pathway on this chart.

With the brisk rally, sentiments improved, shorts got cut, new positions got built, etc. All the usual stuff. The question that emerges is, can it last long enough to continue higher, or is the lower side case still present? To answer that we will to one of my favourite indicators – the Ichimoku. We shall use the s of the different lines on the Ichimoku using my Neotrader software. The next table shows the s for the Nifty 50 and Bank Nifty over the weekly and daily time frames. The advantage of using Neotrader is that all the necessary information is available as numbers and it becomes a lot easier to read the signals. A chart with Ichimoku certainly will show the same signals but for those who are not familiar with this form of charting, things may be a bit confusing as there are many lines and one has to know the details of each of them. Using the s, I shall seek to explain the significance and put together a scenario for the future.

Ichimoku has many lines tracking different trends. Let’s first start with the short (Tenkan Sen) and medium-term (Kijun Sen) lines. These can be envisaged in two timeframes (daily and weekly). The positioning of these lines relative to each other gives us a clear make on the trend. So first let’s start with the daily time frame. Here is what is the relationship looks like:

The different relations are shown. It is obvious that when the short-term is below the long-term, then the trend is down. And vice versa. This is doubly confirmed when the price is below the TS line too. Note that in the Bank Nifty the current price is below TS and KS lines as well as the TS is below the KS, i.e. all conditions are bearish. In the case of the Nifty, we have a somewhat mixed picture. The TS is below the KS (so bearish in the short-term) but the price is above the TS (so the trend may be up slightly in the very short-term) but the price is very close to the KS (so the trend is flat in the medium-term).

Hence the daily set-up shows the Nifty to be in a bit of a mixed trend but the Bank Nifty is clearly in a downtrend.

Now, look at the weekly s. Here are the relations and conclusions.

Again, Nifty is showing a mixed trend picture. The price is below the TS (short-term is down) but the TS as well as the price are above the KS (so the main trend is still up). This means that if prices were to improve beyond 17,500 in the week ahead, the short-term trend in the Nifty will get aligned with the medium-term and that can be a good signal of some trending possibility in the Nifty. However, this is not the case in the Bank Nifty where two of the three relations are still showing down. Therefore the Bank Nifty may have to work harder to turn matters around.

It seems evident that the Nifty is the index to play if the market is better in the coming week whereas the Bank Nifty can, at best, stage a rally.

Now the next question is... if the market goes higher and we buy the Nifty, what can we expect? The same set of lines along with the Cloud levels can be used as target zones. The weekly TS line is at 17,693. The prices are below this line and hence a move to this level can act as a resistance. That is about a 200-point move from where we closed last. What if it continues higher? Then the Cloud upper (18,014) can be the next target zone. That is a decent upside target if it were to occur.

Another question pops up, what if the breakout doesn’t occur? That is possible because the KS line can act as a resistance when approached from beneath. So the daily KS line is at 17,496, which is where the prices are at. Also, note here that the Cloud lower level is 17,490 adding to the cluster of resistance. We have seen that the Nifty trend is mixed to good and hence we should expect lower supports to hold. The first of these is offered by the TS line on the daily (17,217) and if that gets violated, then the weekly KS line is at 17028.

The support level also corresponds to the 38% retracement zone as well as the largest Put Open Interest concentration for the Dececember series options. This creates some additional supports at the lower levels that may not be easy to break.

Hence, we can use a first-level buy around 17,200 if there is a dip and definitely take a stance at 17,000 levels that can be a very low-risk entry point.

As far as the Bank Nifty is concerned, we should wait for more signs of strength, the least of which would be for the price to cross the KS line on daily (37,744) and also for the TS line to climb above the KS daily. By the time that happens, the KS in the weekly would also get exceeded.

What about the longer term? For a read on that, we take a look at where the Cloud levels are with respect to the price, TS, KS, and CS lines. We can note that in the case of both Nifty and Bank Nifty, the Cloud levels are far beneath the current price levels, meaning thereby that the long-term trend is not going to be threatened at all. Hence investors can lean back and stay comfortable and sanguine about their trend position.

A final read can be taken from the CS line. It is noted that the CS line is above the cloud in both time frames. But in the Nifty, it is below the prices in the daily while in the weekly it is well above the prices. This once again shows the trend picture in the Nifty to be a bit mixed.

The daily CS Line combined with the price touching the lower cloud would suggest that even if the prices stage a breakout past 17,500 levels in the coming week, the pace of advance may not be so high. Unlike the last week where we had four successive rising days, matters may be a lot more laboured or trends may be quite slow.

It would therefore be a good chance to short straddles and strangles during the week.

In the Bank Nifty too, we have similar signals for the daily charts and here too the going may be laboured. Hence option traders can plan to be active from the shorting side in this index as well.

Finally, note that we did most of this entire exercise of analysing the trends, coming up with an expected direction, setting up breakout or failure points, setting higher and lower targets, and also concluding on the type of move that may occur, without once taking a look at the Nifty charts. That is really the power of Neotrader, one can analyse using the chart data even without looking at one. But anyway, for those diehards who would want to look at a chart, here is the daily and weekly picture of the Nifty with Ichimoku. Those interested can correlated the figures based analysis with the chart and see how the same results are achieved.

In conclusion, we look for a breakout above 17,500 as a signal to go long in Nifty while a failure to do so can lead to some pullbacks to retest the supports. Given also that the pace of movement could be slow, it could be a week to consider short option strategies too.

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.