Nifty This Week In Technical Charts: Breadth Still Holds The Key

Quite in line with that view, the index dropped a bit further when trading began for the week but the subsequent four sessions have seen a recovery. But nothing joyous about the recovery—except for some sentiment relief—because the prices could just about make it back to the levels of previous week's close. The rise, as can be seen in the intraday chart, was a pretty laboured one.

Monthly expiry was almost uneventful—except for the strong squeeze applied to put sellers in the last 15 minutes on the expiry day. That was obviously some machination and those that play the short side should be well aware that these shall keep happening every couple of months. I think in August, it happened twice—first on 4th and then again on 25th. So, put sellers may be on a bit of a back foot in the coming month, perhaps.

Not that they appear to be too discouraged—for the monthly option series still betrays a high PCR. It may be too early to call it for the September series but the signs are still of a market that continues to be in bullish mode.

Since the indices really did nothing much during the week, it may be a good time to see what the rest of the market is doing. The table below shows a list of sector indices, with different stages of the trend.

Column one shows the indices that are trading at all-time highs. Column 2 is for those that have shown a very strong rise from the lows, making it almost till former highs. Column 3 is for those that are still in a decline but pulled back some of the last 8-month decline. Finally, column 4 is for those that are probably still in a decline, for they have not rallied much at all.

What is interesting here is that if you combine column 1 and 2, you are probably looking at some 60-70% of market cap of the Nifty! Then another 15% (column 3) is into a pullback. This leaves only about 10-15% of the market yet struggling to get back on its feet.

Forgetting the main indices, if the rest of the market is either hitting new highs or reaching out to near former highs, then where is the point in thinking bearish? This is not to mean that the market cannot become bearish—it just means that the probabilities for it seem pretty low right now and, hence, one should avoid going down that road until some fresh evidence emerges. Clearly, breadth still holds sway over the trend in the market.

Granted, we have had a large 2,800-point rally in 45 days and that is no mean feat. But post October 2021, all moves have been sizable ones—2,100 points down, 1,950 up, then ~2,700 down into February 2022 , followed by 2,500 rally into April and then 2,900 points down into June and now 2,800 up! Chart 2 shows this roller-coaster ride.

So, it is not as though we are strangers to big moves. We have already discussed in earlier articles about how limited the damage over the last eight months were (confined to around 25% of the whole rise from 2020 bottom). Hence, the bull grip can be considered to be strong, yet.

But those that look at valuations or have already made up their minds about down moves offer different arguments. Based on technicals, volatility at high prices is a sign of distribution. Hence, one should not get swayed by the lack of price damage, because the market is being held aloft to distribute.

Based on fundamentals, the Q1 earnings for the Nifty came in lower, at around 186, and hence, the consensus forecast of around 850 would be very tough to achieve over the next three quarters. Ten-year bond yield is around 7% and if this were to rise, then the index multiples may slide quickly (currently around 21 times on forward).

Each to his own. Ultimately, as the market psychologist Van K Tharp said, "We all trade what we believe about the market rather than what is." If conflicting opinions weren’t around, then there wouldn’t be a market, right? So, readers need to take stock of which camp they belong to and judge accordingly.

As far as I am concerned, price is the final reality and everything else is just perception. So long as prices don’t wilt, so long as price damage to leading stocks doesn't continue, so long as top stocks rally back strongly and so long as unwillingness to hold stocks manifests as a sentiment, I am happy to hold my portfolio and continue with a buy-the-dip approach. I am happy to trade short in between (as the swings are large enough to profit from) but the main trend still remains up.

The FIIs are back and buying strongly. That gives the DIIs some space to churn their portfolios and take some profits on what they have been (forced to?) buying for well over two years.

This might mean some shift out of large caps (up to their eyeballs in it) into some quality mid cap names (thrown up in the Q1 results). That may keep the needle moving for the mid cap area.

FIIs seem game to take up big blocks (as they need bulk deals) and that is going to allow some PE investors some nice exits and also keep the FII flows positive. Together, these two events may keep the sentiment going steady and that is enough for most people.

What disconcerts people the most is a slow-and-steady decline. They can handle a swift fall but find a drag downward very tough to handle mentally. If sentiment remains largely flat, people remain happy. And then they participate. This keeps the volume meter ticking. So, the whole market is happy! Let’s see if this kind of scenario plays out ahead.

The last article had spoken about a new monthly close in the making for the Nifty. The index is flirting with that as the month ends. The highest close is 17,715 for the futures/17,671 for spot and will be something to watch in the coming week. Anecdotally, a new all-time high monthly close often leads to further gains in the prices ahead.

Since the rise for the past six weeks has been almost without any correction, a moving average can be applied as a tracker to the current index.

A 21-period EMA lies around 17,600 area and trailing stops can be moved to just below this for active players. A renewed move that closes beyond 17,855 will bring the momentum back into the daily charts and will probably take markets higher next week.