Nifty Technical Charts And More – Keep Your Eyes On Four U.S. Cues

Traders continue getting tossed around by the market. We started weak, rallied up, then gave it all back, only to rally back again by the end of the week. So, the saga of volatility continues. Intra-week trading remained very difficult as gaps and lack of a follow-through kept taking a toll on whatever positions were created. The VIX moved sharply as uncertainty deepened and nervousness increased. Everyone is searching for a bottom that is proving to be elusive so far. The week in pictures was thus.

Monday was a confusing day and then some recovery in the United States created a brisk rally. The speed of the rally smacked of the typical bear-phase short-covering one and thus its end as it reached 16,000 levels on the Nifty was not a surprise. But that was not so while we were all trading it because all of us wanted this painful decline to end, and hence thought of the rally as a solution to our problems. Then the big gap-down took the wind out of everyone’s sails and brought prices all the way down to test the resolve of the bulls at the 15,750 area. So far, that seems to be holding as Friday saw another rally attempt emerge from those areas. The entire week trading has been one large expanding pattern, not exactly encouraging for more gains ahead.

At The Mercy Of Wall Street

The fall as well as the rallies were both dictated by happenings in the U.S. Inflation worries are driving the U.S. and the rest of the global markets too. Indian inflation too has moved to a not-so-comfortable level and the RBI has already swung into action. It is expected that there will be another rate hike in early June at the next meeting. But as in the last hike, RBI has shown that it does not need periodic meetings to take action.

So, it is really down to the analysis of the U.S. markets and related stuff for us to know what can happen here. This means looking at Dow Jones Futures every day, all day, the U.S. 10-year bond yield, the Dollar Index, and the USD/INR chart. After doing all that perhaps, we may want to take a look at the Nifty.

Reminds you of that old song, ‘Begani Shaadi Mein Abdullah Deewana’. That is how we have become. Walmart and Target sales were down, so the Nasdaq falls 6%? And we follow with a 3% decline? And, consumer stocks fall sharply here too. What, are the Americans are coming to buy Lux and Surf? How silly can it get?

Sentiment: The Ultimate Driver

The market is all about sentiments and that is what is proved by these moves. We all believe that market movement is based on earnings or chart patterns. But the final arbiter is always sentiment. The numbers, the charts, the opinions (firmly or weakly held), etc. are all subject to the ruling sentiment. The market allows us to fool ourselves with our beliefs but periodically turns around and kicks us in the teeth. It gets everyone back to being sober. The past three months have been one of those times.

So let’s go back to the sentiment indicator chart that I had featured a few weeks ago. On the daily chart, it reads ‘Extreme Fear’.

The intraday charts show something similar. The weekly chart is reading Neutral (perhaps owing to the prices still trading above the March lows). We need to use that (the weekly i.e.) to play but we live through minutes and days and hence it becomes very difficult to keep the fear at bay.

Now, the question is not whether the weekly chart will also turn into fear mode because that will simply be an extension of what is going on.

The more important point is that the sentiment damage in the intra-day and daily charts will take time to work itself out. This means even if we have some rallies, it is not going to signal some immediate change in the trend. There is much to be done before matters turn around.

The sharp rally of Friday needs to be seen in that context. Despite the large-sized rally, the sentiment indicator in the 60-minute chart reads ‘Fear’ while that in the 30-minute chart reads ‘Worried’. So, much will depend on what happens by way of follow-through action in then next week to see if repair is done to the sentiment.

What To Watch And When To Act

In doing that, we have a little help from the Dollar Index pulling back a bit from the recent high. It needs to break 102 levels to signal even the first of the hints at reversal. The situation in the U.S. 10-year yield is similar, where a continuation below 2.72% will send out the first of the signals. These are to be awaited ahead in the coming week.

Given that as a setting, how do we handle ourselves going forward? First is acceptance. Accept that the market is not going to fly away. Drop those expectations of new highs periodically forecast by enthusiastic dreamers.

So every rise, for now, is a bear-phase rally. Typically, they will be swift and strong but very short-lived. To take advantage of those one has to be swift too.

Second, the swings are big. So there will still be room left to get in and out. Hence you must participate when you see an opportunity. However, make sure to get out too when you make some money. Don’t sit around expecting big gains. Likewise, if a trade goes against you, don’t sit around with the hope that it will revive. Your nerve will give out before it reverses and you will rack up large losses. If all these sound like too much to do, then just leave the market alone for now until it settles down to a more ‘normal’ behavior. When will that happen? No idea. No point in trying to guess either. When sentiments run high, data and patterns get obscured by emotions.

Then, of course, there are the mandatory ‘levels’ that everyone wants to see or hear. So here goes. 15,750 has been built as good support. Violation of that may see a fall to 15,610 or even to 15,220. On the upper side, 16,500 seems a resistance, with a gap above and an option position concentration. Above that, the index may lead a charge towards 17,100. For now, the weight of evidence points to the lower targets being achieved than the upper. Not exactly a pretty picture. It is up to the market to paint it differently.

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 BQ Prime or its editorial team.