Let’s get straight away to the main question that traders are seeking answers to. Did the market make a durable low on June 17? A convincing answer to that question is needed for us all to become surer of our actions in the market. These sort of tentative plays that many have been attempting in trading are only leading to stops getting hit and losses, even if small, piling up.
It is also a question to ask now, because of the following findings on the first chart.
The prices for the down leg from April 5 were related by a ratio of 1: 0.618.
The down leg from April 5 was about 2,950 points which about equalled the decline from October 2021 to March 2022 down-leg.
A pitchfork drawn using the legs of the October-March-April price pivots and with internal channels is met exactly during the June fall.
The time taken for the first big down-leg from October to March was 95 trading days while the April-June leg was 50 trading days – approximately 50%.
Was there anything else? Well, the index has fallen in three sections of the decline.
Most of the time, any trend has three or a maximum of four sections in it.
It is more the extended trends that show four sections. This one has been more orderly and hence we can take three sections as being good enough, as seen in the second chart. This chart also uses an esoteric technique of ellipses and that too has signalled a change for now.
One more. June 21 is an important date, Gann-based, and we find the index making a gapped advance on that day. Is that clutching at straws? I don’t know but, so far, the June low is holding and the gap of June 21 was filled and prices recovered from there. So, until the recent low breaks, I would want to take it that a durable low has formed.
And then we go to momentum.
We also have RSI divergence at the June low on daily charts. The trendline overhead has to break for this to be validated of course and that is awaited.
Since there hasn’t been much of a move after the low, signals have not emerged on the indicator charts. Some continued price action upward can create the required triggers for converting the momentum alert into a buy signal.
On the daily chart shown in the second chart earlier, we can note that the long-range candle made on June 15 (with a stop at 15,865) will hold sway for now and will need to be crossed for prices to get released to move.
The next major question would be whether we have formed a durable low, can there be a smooth uptrend from here now? The answer to that question seems to be a No. Take a look at the third chart showing the Ichimoku on a daily time frame.
As annotated on the chart, rallies will run into a thick cloud overhead and that will keep rallies limited. Even if overcome, there is still a big Kumo shadow that is around to limit price action upward. The Chikou span is deep underwater and much price action will be needed to set it free. The future Kumo is also quite in a bearish set-up with no immediate chance of a twist being set up. Collectively, all these say that speed may not be forthcoming except for a day or two.
In last week’s column, I had already mentioned that in the weekly charts a bearish Kumo twist had occurred and prices too were below the cloud. The only positive here is that the bearish candle of the last week did not see any follow-through action in the week ended.
What the Nifty will need here is some good support from heavyweights. Is that available? Not much, really. Most sector indices are underwater too, with patterns similar to the Nifty 50. The only exceptions are the Auto, PSU, Energy and Infra indices. The fourth chart shows the good set-up for the Nifty Auto index and therefore for the expected rally, that sector would be an area to focus on perhaps.
Dominant in both the Energy and the Infra indices would be Reliance and that stock has been volatile over the last many weeks. Trends there appear to indicate that it may revive from supports once again. Hence these two indices too may get a leg up. The latter index (i.e.Infra) is a much wider index of 30 stocks and hence its continued improvement may denote a broader recovery of some leader stocks. So it is something worth watching.
The bad news is that the banks and IT sets still appear to be quite depressed.
With individual stocks in downtrends that persist, it would require some news flow or an event to get them rising again. Without them, many of the index heavies are injured and may not play.
The fifth chart shows the Nifty MidSmallcap 400 Index which contains many of the top midcap and small-cap stocks that are of interest to many. Here we find a similar dip like in the Nifty 50 but one is encouraged by the sight of a nice long lower shadow candle formed for the week. This attests to good buying interest in top midcap and small-cap names and continuation in the next week could herald a rally. Also, the inability to sustain a follow-through on the very bearish-looking preceding week candle is to be taken as a positive. If a rally continues in the coming week, there will be some good repair to the sentiment too.
Summing up, this is where the week’s trading has brought us. To a possible point of forming a durable bottom. This straightaway means that the June 17 low should not be broken with any degree of conviction – meaning a bit of a poke here and there should be fine. With that as a caveat, we can now start thinking of longs as a clear stop-loss zone is available. More needs to be done by the Nifty 50 to confirm the low formation—by way of some up moves—and that is what we should be looking for. We have a few sectors, auto in particular, to focus on for stock participation in case the market confirms our diagnosis. Now, over to the market to do its bit.
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.
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