Nifty 50 Index: At An Inflection Point … Stay Alert!
The fact that every dip is seeing a recovery leading to new highs is keeping the sentiment still ticking bullish.
The market blew hot and cold in the last week. After hitting (or just piping) the all-time high, Friday witnessed a sell off that broke the prior swing low on intraday charts. So, good (new high) and bad (swing low break) news at the same time! Is the sentiment shaken? Not much, really. The fact that every dip is seeing a recovery leading to new highs is keeping the sentiment still ticking bullish. But tinged with nervousness, no doubt, especially to seasoned market players. They see such moves as some form of distribution and experience has given them some healthy respect for caution at high levels. In contrast, new and recent traders (post 2020), who have seen ONLY a bull market in their lives go about merrily buying into dips.
The irony is that the newbies are winning hands down! That is because we are in the midst of such a strong bull trend. Sentiment is made by all sorts of players but right now, the bullish noise dominates and it spews out of TV channels, Whatsapp and Telegram channels etc. etc. These influence the sentiment and the general consensus that BJP will win comfortably keeps the selling on hold, thereby validating the buy-dip approach of many.
I have been advocating that approach as well because I follow the price trend. So long as that doesn’t tell me different, I have no reason to change that stance. Trailing stop levels have been mentioned in almost every weekly letter and market doesn’t seem to be bothered about breaking them. The lack of upward thrust may seem worrying to some players but the fact that the market keeps recovering and creates a new high also creates the need for a fresh lower top- lower bottom pattern to appear before calling for some caution.
In that context, chart 1 shows some slight complexity developing.
I have marked 4 highs that have been attempted around the 22750-800 area. History tells us that when a resistance level is not crossed in four attempts, then the resistance is high and needs to be respected. So, let’s for now consider the 22800 is a solid resistance. Next, there seems to be a clear trendline break (marked Usual trendline) and that can be considered another warning. Further, the last minor swing low has been broken decisively by Friday decline. There is fourth as well (not shown in this chart) and that is, formation of a bearish engulfing pattern in the Daily chart. So, not painting a pretty picture for the moment.
Now, note a second trendline that I have drawn to the chart, marked as ‘Possible revised trendline’. This line is drawn because there is a new high price print. The rule for trendlines is that whenever there is a new high created, the trendline’s second point needs to be revised. Accordingly, the last minor low which was joined to the 19th April low cannot be used and we may have to use the low made on Friday (assuming that market goes no lower) and that would mean that the trend is not broken as signaled by the break of the Usual trendline. This is a nuanced interpretation of trendline rules.
Another possible nuance is drawing trendlines using Closing (Line) chart. This is shown as an inset within Chart 1. In this chart, note that there is no fourth attempt as it was only a high price print and not a closing level high. This is not captured by the line chart and hence, after three attempts at the resistance level, the prices cracked a support trendline and also set up a minor lower top and lower bottom pattern, thus signaling a possible change of direction in the short term. Thus, here the break of the trendline is valid.
We can also use momentum signals to decide which of the two is applicable. Chart 2 shows the same 75min chart with RSI added. Based on the recent moves seen on the RSI there are three Rsi high points. The second one is a Class 2 type divergence but the third one is not really a clear divergence. So, the outcome is indeterminate.
But leaving the divergence part aside, what we can note is that the recent rally back to 22850 levels has seen the Rsi move only to 60 levels on the daily chart and this could become an important Range shift signal in the indicator, implying a possible continuation of the correction began on Friday.
Raising perspective further to the weekly chart (see chart 3), we find that there are two rejection shadow candles, albeit of not such a big range. Thus, the market is witnessing some surrender at higher levels. The small body nature of last week candle shows the way. If prices remain below 22500 in the week ahead, then the reaction can continue further down. On the other hand we will need a strong move above 22700 for getting back into the uptrend. The chart also shows the ADX set up and we can note that, while the DI lines continue to remain positively phased, the Adx line has started dropping. This implies a loss of trendlines in the index and, at the very least, we may see consolidations ahead if not declines. The RSI on the weekly chart is well placed but softness this week may erode that strength. So, we need to be alert for that.
How deep can the reaction go, if one was to emerge? The swing low area near 21800 has seen multiple attempts to break it being rebuffed. Hence that should be considered a good support and target area. Option positions for May series shows large open Put shorts at 22000, adding to the support there. Hence the expected lower range should be 21800-22200 if declines occur. We can review there (if reached) for further possibilities. All nearby contracts show call shorts than Put additions, so the thinking seems to be for limited headroom for the bulls. Therefore, the reckoning above that longs are indicated only above 22700 seems to be a correct on, based on current data.
Time cycles for May suggest inflection points around 6th, 14th and 29-30. End of May should see the Nifty end at the highs for the month and so the intra month dips should be bought for a better finish. Better is relative to where the dips are and is not to be taken as a new high or some such.
Given the downward bias, quarterly results of the week will have a bearing on the sentiments and action. Hence do watch for them closely and check market reaction before entering. This time around, be ready to take some bearish action (for short term traders) on bad news too. Good auto numbers and positive trends can make that a sector of bullish interest. Power, Rail, Banks etc are showing stock specific action and may continue to do so. IT is still getting squeezed so avoid any bottom fishing there. Attention may also get focused on several new IPOs and their listings from both the main board and SME exchanges.
If declines occur, readers may want to book some profits on some holdings to make room to buy them back later. Use some hedging if you are less inclined to book out. If the low of the month occurs by early this week, then can buy for improvement across the rest of the month, with speed to be seen only after 14th. If low occurs around the mid-month then can go long with a suitable stop for a high finish for the month.
