Nifty This Week: Technical Charts And More – Happy Tidings ... With Some Warnings
We had pretty much nothing to say about the market trends in the last week, except to state that one needed to continue the long with a stop placed lower.
When the week started it seemed like we would probably continue in the same vein. Even on Tuesday, the range remained limited. Options traders were comfortable with their range shorts and looking ahead to another profitable week. But that was not to be. Come Wednesday and the carpet got yanked from beneath their feet. The market staged a breakout and a brisk and forceful one at that. Prices continued to carry on higher all the way to the end of the week, chalking up significantly new highs at 17,800 before some weekly traders’ profit-taking appeared to shave off some gains.
The most important element of the week’s trading was the robust performance of the banking pack. Not only did the private banks bounce up, but PSU banks did too. This was mainly owing to two news inputs during the week – the announcements relating to the telecom sector and then the one related to the bad bank. These two really galvanised bank stocks into some strong moves and that helped the Bank Nifty leap up rather nicely. The banks managed to hang on to much of their gains of the week into the close.
The index progress of the week is shown in the chart below.
As I have mentioned a couple of times earlier, robust advances in Nifty occur when the Bank Nifty is moving in tandem and that is what we got in the past week. One could take advantage of the big move only because we had defined what was needed for a big move to occur. This is one of the big problems that most traders face. They all want big moves to participate in but somehow never end up defining what shall cause that big move. Life is easier when you know what you want – but most people don't take the time to figure out what they want.
Looking at the options side of the market may have revealed some important considerations even through the successive days of sideways price action.
One of the signals is the Max Pain. The next chart shows the Max Pain is heavily loaded in favour of puts, implying that put shorting has continued unabated in the market while call additions have been limited. That clearly reflects a bullish bias as call shorts are not coming forth at all.
But what is more important is the Max Pain trend shown in the lower panel chart.
Here we can see that the Max Pain point has been rising from around 16,600 on Aug. 27, steadily into the end of this week, moving nearly 1,000 points higher. Typically, when the Max Pain point rises for a few sessions consistently, one concludes that a trended move is in progress. Here we can see the indicator has been on a consistent rise for many days. So, whether the market ranged or pulled back or broke out, the option traders were pretty resolute about the trends of the market.
But one of the other interesting charts that one may want to look at is the India VIX chart. See the next chart for details. Its levels are now backing to multi-year lows. Typically, market highs are formed at significant VIX lows.
Probably explains the profit-taking that came in towards the end of the week. When the VIX picks up, a little bit of caution is always preferred.
While the VIX may be signaling some caution, the other indicators are still not doing so. The next chart shows the main indicators I use for tracking trends.
The chart shows the Ichimoku (prices comfortably positions above all lines with the Chikou Span or lagging line in tow), the RSI (no signs of divergence yet), and the DMI (with rising ADX and wide DI lines positive). So trends are still quite safe. That doesn’t mean we cannot have some pullbacks. The Kijun Sen, or base line, for example, is trailing at 17,000 levels (owing to the sharp rise in the latter part of the week) and that can be the extent of a correction. We will get an early warning for this if the Tenkan Sen or turning line breaks.
Note that the TS line has been intact below the prices since the start of August. So, its break may be the first signal of some reaction possibilities.
Using similar approaches but on a lower time frame chart (60 minutes), we get to see the following. See the chart below for details. Here I have shown only the Ichimoku indicator on the chart.
Prices are engaging the KS line on the hourly chart. If that were to break, then there can be a fall which can take prices towards the cloud (B). The KS line is near the last close while the Cloud is at around 17,400. Note here that the cloud is a bit thin and hence breaking that will not be too difficult. Therefore if the cloud is broken, the KS level shown in the daily chart becomes a higher probability target. Point C marks the Chikou Span and if there is a decline, it will lose its free movement zone and start entangling with prices soon.
That will cut out the trendiness and the market may then lean towards ranging. Finally, D marks the future Kumo and if there is a decline, then there shall be a negative Kumo cross which will probably spell some correction too.
The upshot of all this is that we need to watch the trading pattern of next week rather closely and begin to take some evasive or protective action if prices remain below 17,550 (giving some room below the last close). If it happens, as explained above, it can set off a domino of moves.
None of these may happen and the market may simply continue higher. We are all happy if it does. However, being forewarned of the possibilities is always a better way to enter the battle for profits ahead.
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.