Nifty This Week: Technical Charts And More – Clues On How To Trade In May
A trader monitors financial data, on computer screens. (Photographer: Chris Ratcliffe/Bloomberg)

Nifty This Week: Technical Charts And More – Clues On How To Trade In May

BloombergQuintOpinion

After a long time, we had a good week of trading. Most unexpectedly, the Nifty 50 ran up for four successive days, leaving most traders confounded with its pace and consistency. When something out of the ordinary happens, people seldom react quickly and it was the same here too. Most people just stood and watched as it rose, showed gaps, and continued higher. But everyone was happy for one thing – the rally gave an exit to many a trapped buyer who happily took that opportunity to be done with his trade. At least to that extent, the rally brought welcome relief.

But its sustenance was actually driven by the shorts in the system getting squeezed. If we can recall, we were earlier looking for the index to punch thru 15,000 levels to create a continuation move. We waited for about eight weeks for that to happen but it didn’t. Then it hit down to challenge the prior swing lows and as recent as last week, it almost seemed like the lows would give in. It got to a point where we had revised the breakout point down to around 14,600 and not really expecting that to happen before the month ran out.

But a collection of events occurred over the previous weekend that turned matters around swiftly.

Value buyers came in, FII buying commenced, a few good results came in, overseas markets were in good form but most important of all, there were plenty of shorts in the system. And that was the fuel that was needed to get all the other flints to be lit.

As I said, the pending longs looked on and took their hitherto unfavourable trades off, happy to be rid of it. But the shorts had a torrid time after having had an easy time earlier thru the month. Suddenly they were getting the carpet yanked from below their feet. This process went on through the week and culminated with the punch above 15,000. The shorts were cut, the longs were out, the rollover was done and the rally reached the requisite levels on the charts, making the technical analyst happy too! So, in a matter of less than a week, a quick but profitable game was launched, the index was moved by some 800 points and people cashed out. The rest of us either watched or took an exit (if long) or took a bath (if short)!

Inter alia, the overhead resistance was breached and that created some excitement. Will it break through now, everyone asked? The market answered on the very next day with a firm No. Prices pushed firmly back under the trendline as can be seen in the chart below.

Nifty This Week: Technical Charts And More – Clues On How To Trade In May

The chart also shows the meagre momentum that was seen. The RSI couldn’t even make it to the 60 levels, a malady that has struck the index since mid-March and shows no signs of improving. Without momentum, it is difficult for movements to sustain.

But there were a few bright spots like metals. That just carried on further and an improving Nifty helped matters along. News flow also remained quite positive here, with China reportedly moving for export curbs and freeing up some import duties. Good for Indian steel, said everybody, and they bought some more steel stocks. Copper futures have been surging too so steel can have some company along the way, perhaps, and this helped push along Hindalco nicely.

At the end of the week, the Metals Index still looks pretty spiffy. The bears are not getting their foot into this door anytime soon.

See chart.

Nifty This Week: Technical Charts And More – Clues On How To Trade In May

Speaking about metals brings to mind the bullish trends occurring in the commodities area. Global traders have been pouring money into commodities it appears and the CRB Jeffries Commodities Index has seen a sharp rise over the last year or more. In a basket of 20 commodities, net-bullish positions have risen 18% this year alone. They’re up more than six-fold since the middle of last year. The fundamental reasons behind the rally in commodities markets vary. In oil and copper markets, there’s an expectation that demand will begin to eclipse supply. China has become a net consumer of steel and started banning exports. Sugar is benefiting from port delays and a shortage of containers to ship the sweetener, as well as smaller crops in some regions. There now appears to be a new move to hedge inflation risk via commodities as those appear to have gone through a longish correction and are seen improving across the board.

We have a commodity index at the NSE and it is populated with stocks mainly from cement, metals, chemicals, energy, and power stocks. An eclectic mix, for sure. Interesting to see that its pathway mirrors the Jeffries CRB index.

Nifty This Week: Technical Charts And More – Clues On How To Trade In May
Since both the CRB as well as the Nifty Commodities Index are showing sufficient strength as yet, we can expect the component stocks that I mentioned earlier to continue to flourish into the future.

The Nifty Commodities Index has no sugar stocks perhaps because most of them are of penny variety. So only the leaders there (Balrampur, Dhampur, EID Parry, etc) may be of some interest.

The question now is, what lies ahead in May? For the record, May has seldom been a negative month. While that may be comforting, it cannot create a trend. With the ‘game over’ notice up on the screen as of this week, I feel we may be set for some grinding once again. We shall once again go throrugh that 300-500 point range.

What I am about to say now may not be very palatable. The last year we have seen a terrific range expansion across a quarter. The average Nifty range across a quarter would be in the range of 1,000-1,100 points. This doubled to 2,000 points in the last five quarters.

Now with some semblance of trading normalcy returning and the vaccine rollout hopefully eventually taking care of the virus menace, it is probable that market may revert towards the old mean.

This could well mean that ranges may crunch progressively, going towards the old 1,000-points per quarter trend.

If that is going to occur, April has already done 890 points or so! Maybe it is not going to all happen immediately, but just think about it. If we are to revert to mean, then the next two months may have the potential to move the market higher only by a limited amount? Note that this also includes the possibility of the Nifty recording a low below April, to complete the quarterly range! See chart.

Nifty This Week: Technical Charts And More – Clues On How To Trade In May

Not that this is going to be a bad thing at all. There are going to be enough triggers ahead for us to keep ourselves busy. It is just that every now and then we should pause to take a look at the path ahead so that we don’t mistake one path for another. Just doing that in my effort to crystal gaze!

So, it is possible

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.

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