Nifty This Week: Technical Charts And More – Key Clues From Inter-Market Analysis
We had a very good week, following up of course on the previous three good weeks we have already had since then market bottomed out on Dec. 20. There was cheer all around as there is no better mood elevator than the rising value of your portfolio. Traders also love a bullish time because the rising market sees much better participation and hence stock picking becomes a lot easier- and most of them work out because the trend is enabling those picks! So, in a bullish phase, we have a kind of virtuous cycle playing out. And so it was in the last week, as shown by the intraday price action through the week seen in the first chart.
It is to be noted that the intraday moves over the last two sessions were largely range-bound. Hence the top and bottom of this two-day range become action points for day traders in the coming week. As to why this happened will become evident in the following section where we discuss some long-term correlations using inter-market technicals.
The first round of results from the IT majors came during the week and they did not exactly light up the street. Not yet, at least. Banks are often looked at for providing a helping hand. But they seem to be stalled yet and may need a booster dose from good results of leaders. One will have to await that.
The next chart shows this ratio.
Now on to the inter-market analysis that I referred to earlier.
One of the primary drivers of the market in recent times (from the low in December 2021) has been the sudden weakness shown by the U.S. Dollar. The Rupee gained sharply in the last four weeks and that has led to a rapid revival in the Nifty.
Over the years we have seen a very high inverse correlation between the USD/INR rates and the Nifty moves.
The USD/INR pair is also driven by the status of the Dollar across other currencies and this is best represented by the Dollar Index, a basket of the Dollar against six major currencies.
This chart shows correlations between the three instruments.
Some observations are hereunder:
The Dollar declined from March 2020 for a year and more, until May 2021. During this phase, the Nifty had a glorious run upward.
The Dollar Index bottomed in December 2020 while the USD/INR bottomed in March 2021 and both of them repeated a double bottom by May 2021.
During this phase of bottoming of the Dollar, the Nifty moved into a correction (shown within a rectangle)
The Dollar Index strengthened briefly and gradually till August 2021 but the USD/INR was more ranged, creating a slight higher-bottom by August 2021. The Nifty picked up substantially during the phase and ran on to create a new all-time high by October 2021.
The Dollar Index started its strengthening run (or rather continuing its gentle up-move from the May 2021 low) and the USD/INR pair too ran up in a more volatile way till its peak in December 2021. Both of them peaked on the same day.
The Nifty seems to have overrun the bottoming of the Dollar in August, extending its upward run till October, owing perhaps to some surge in local liquidity.
Nifty correction ran from October high right into the topping out of the Dollar Index and USD/INR pair in the week ended Dec. 13, 2021. Marked by an arrow.
Note that the move of the USD/INR pair has been extremely ranged since July 2021 until now and the Dollar Index shows a similar ranging between September and November 2021. These are marked by large grey rectangles.
Throughout these periods, the Nifty has had two corrective phases that have been more of time corrections rather than price corrections. These are marked with two thin rectangles.
We now come to the present. The reversal in the USD/INR pair, as well as the Dollar Index, has created a new rising template for the Nifty and it seems to have grabbed the opportunity with both hands. The fall in the USD/INR pair appears to be sharper compared to that of the Dollar Index. The price of the USD/INR pair is back inside the consolidation rectangle while the Dollar Index still rests on top of a similar rectangle.
At the start of this article, I had mentioned that the reason for the two-day consolidation of the Nifty would become apparent with the inter-market analysis. The final chart shows the most recent price action of the USD/INR pair.
Note how the currency pair started a small recovery process over the last two sessions, and there was an immediate impact on the trendiness of the Nifty rise.
This is not to be taken to mean that the currency pair or the Dollar by itself has a total correlation with the daily moves of the Nifty, it doesn’t.
Moving ahead, if the Dollar Index were to weaken further and slide within its consolidation rectangle (i.e. below 94.60 levels), then it may pull the USD/INR pair down further for a retest of the 72.50-73.00 levels. All this may take a while. Currency markets often yo-yo a lot so don’t hold your breath on this. If matters eventually move along these directions, then the Nifty should improve substantially from current levels also and most likely post new highs. I shall sign off this week on that cheery note!
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.