Nifty In Technical Charts: Earnings Season Induced Trends Likely

In the last week we were done in by some sudden, unexpected volatility, caused by new tensions in Israel vs Iran matter. Global markets took this seriously as did India and although the Nifty showed a cut of only 2.1%, that was after a recovery from the depths. The harm to the sentiment was a lot deeper, as evidenced by the fact that the open interest in futures rise sharply, from 1.3 crore contracts to 1.56 crore contracts. This is clearly new short positions that have got added. But the recovery from the lows seems to have assuaged some of the panic because the PCR is a sedate 0.9, implying no panic in the option segment! Now, that is a bit of a contradiction.

Let’s check out some retracements. From the intermediate low (Oct. 23) to the high, we pulled back 23.6% to last week low. From the short term low (Jan. 24), we have done 61.8% to last week low. If you expand the time frame of the chart, you may not find the low of Jan. 24 to be an important one at all! So, what has really happened is a minimal (i.e. 23.6%) retracement of the last intermediate leg upward. Is that a reason to cry Uncle? I would think not. So, why are a lot of people speaking and behaving as though the whole jig is up? See Chart 1 for some perspective of what I am stating here.

It is probable that the correction may continue towards the 38.2% retracement too (at 21,350) without anything damaging the ongoing trend. But that seems tough too, considering that we put in a lower shadow candle last week and also hit the lower end of a channelled move that we are experiencing right now. Even if it were to occur, it may be of some relevance to very short-term traders only—who, in any case, can swing over to trading short wherever necessary. Those that are following the bigger swings remain undisturbed as yet (except in their mind where they keep on playing unnecessary ‘What If’ scenarios!).

But the FII sold quite a bit and that may have spooked local traders and investors. Realise that they have their own compulsions but our local factors have been becoming more dominant steadily over the past many months. SIP continues unabated, GST collections are growing every month, inflation is down towards the RBI target zone and finally, earnings season has commenced. I'm thinking that local factors shall overhaul misgivings about FII selling even if the Nifty slips a bit further. This continues to remain a buy on dip market.

Take a look at the Bank Nifty- that too fell a similar 2.3% last week but doesn’t seem to have picked up any new short position. Here too the PCR is around 0.90. HDFC Bank results have been announced and though there can be some nitpicking about the details (one time gains, provisions, retail banking margin erosions, etc.), the ADR is not much affected over the weekend. The coming week has results from other banking heavyweights and the market may wait to see those numbers before taking a call on the fate of the Bank Nifty ahead.

Given that both indices have fallen into supports and halted there, the last week lows become important points for judging the trends in the coming week. A decisive break of 46,611/21,813 in the week ahead may signal continuation of the correction. But if it moves higher from here, then one of the two of the following paths can be taken. See Chart 2, showing intraday Nifty future chart with some Elliot wave markings.

Chart shows a 5 wave decline into last week support. Now, this move was within a channel, and any channelled move is deemed a corrective wave. The channel is on from January to April 24. And within a corrective wave, the final leg ‘c’ is in five wave sequence. So, those fit here to call for an end of correction at last week low.

Now for this to be validated, prices have to unfold higher and move past the 61.8% of the last fall.

That is placed at 22,450 and there is a gap zone just above it at 22,550. So, that is the target zone that we can make for a rally, if one were to unfold from here. Two pathways are shown and market may choose either, but with similar targets. The only caveat here is that prices should not go below the start of the move (mentioned earlier). Hence targets and stops for the week are inherent here in this discussion.

Using Gann time counts, April 19 and April 23 are important time turning dates. We saw a low being recorded on the April 19. Maybe we have a retest on the April 23? Also, Gann angles also supported the decline of Friday into it. This was an odd half angle count but important all the same. If in a retest ahead (if any), this support holds, then we can be certain of a rally to unfold higher towards the targets mentioned above. See Chart 3. It shows some Gann price cycle levels as well as angle lines drawn for support from the lows of Oct. 23. I have used a Half Angle method of Gann to find a support at the last week’s low. Since the time count is at hand, a price support will combine well with it.

Any break of this in the immediate future (after April 23) could mean that the prices can seek out the next price cycle line which lies at 21,600 area.

We're all trying to foist a lot of views, a lot of analysis etc. into finding meaning for what the market is doing. A look at Chart 4 tells us a story that we should pay heed to.

In this chart I have shown just one oscillator (the DMI lines) but all other oscillator charts are similar as well. It shows, in the rectangle area (from Jan. 24 till date), that the market moves lack any significant momentum. We have all been carried away by new all-time highs and sometimes scared by sudden drops (like last week) but none of them are really turning into anything substantive. It's a simple conclusion that when the market is not prepared to accelerate, none of our reasonings will make it do so! But we continue to do so, thinking we can crack the code!

This is why I often mention about longer term stop-loss levels. You are currently unfolding a bull market that is already four years old (March 2020 to now). Hiccups are bound to show up every now and then in such cycles. But so long as those hiccups don’t do any serious price damage, we should learn to view markets a bit dispassionately. By doing so, we may possibly miss out on the final turn downward initially but that is a lot better than the hundred times that people have called a high to this market and sold out. Worse are those who say it is too late and did not participate. Once you understand and accept the risk that comes with the territory, its not so hard to deal with it.

For short-term players, the market almost came down to trigger the second stop level (remember we should check these on closing basis) but seems to have survived. The next move higher would be important one- to check whether it forms a lower high or can go on to establish another new high.

The way to deal with the markets in either of those two cases would be different.

A lower top followed by a break of last week low would be a signal for even intermediate players to move out of a buy dip sequence for a while. A higher high getting established would simply continue to ongoing bull market and we can continue doing what we have done till now- that is, to buy dips.

Earnings season has commenced. So far, a mixed picture. Next week or two should see a lot of big names come out with their numbers. This ought to keep the trends busy and possibly volatile. Better therefore, to be stock specific for a week or two, following news-induced directions in individual stocks to trade in. Indices may possibly play second fiddle to the stocks in the coming week or two.