Nifty This Week In Technical Charts: Choose Your Plays Carefully

Sometimes, in the market, you really feel like you are dealing with a petulant child. You know, the type who doesn’t know and will not listen either. Our markets were somewhat like that in the week ended Oct. 15. It refused to go lower and then when offered the chance, refused to go higher too. Such markets may be good for a few (option sellers) but not for the rest, who largely play directional. On an intraday basis, across the week, this is how the action went (chart 1). The current move had started in the earlier week with a down gap and ended this week with a gap up. And yo-yoed in between.

We had enough dope to go lower as the US markets, too, were on a slide with poor macro numbers and our own rupee on a slide. But note how directional moves would simply not emerge. Trading was really tough during the week, if you were a directional player. In fact, over the last one-month, frequent large gaps have been a disconcerting feature. This is shown in chart 2.

When you see the picture across a month, even here we see two distinct sections—the declining first half, which many people can handle because the direction is clear—and the consolidating second half. It is the latter that becomes tough to handle, especially when there are large gaps.

And now that the results season has commenced here, we may also shift our attention away from what is happening in the US to what is happening locally. I had stated this more or less emphatically in earlier week letters, wherein I had asked investors to stay away till mid October.

Hopefully, that situation may be about getting over now, as the US markets appear to be shaking off the weak macro data. Friday saw a robust advance post the poor CPI numbers and the Dow managed to hold most of those gains. But that is in the short term. The multiple gaps on the Nifty (or Dow chart for that matter) all suggest a market place that is finding difficult to handle the quick shifts of opinions. With technology having almost completely eliminated as an asymmetry, everyone now has access to almost everything and in very short time. Hence the volatility has increased which at the same time also increases the uncertainty in the minds of people. This problem is only becoming more acute as the days pass.

The Bank Nifty acquitted itself reasonably well and finished the week with some gains (see chart 3). However, the last three weeks have seen prices remain in the same range and hence some resolution to the short-term trend may be possible in the coming week. If 38,500 levels are compromised clearly, then consider a downside resolution. A move above 39,625 on spot charts would shift the odds in favour of the bulls for the coming week. Here too one has to watch for the results of the major names. Generally, something better is expected so look for upside breakout. Federal Bank came out with very good numbers and is a counter to watch and trade if banks are play in the week ahead.

The first set of results (mostly tech names) was ok and though Tata Consultancy Services didn’t manage it, Infosys did ignite some buying interest in other IT counters. Some more good results can probably nudge the IT stocks to continue their gains by another 5-10% further. But without good numbers from the second-tier names, this rally attempt may quickly fizzle out too. The only top performer from the sector, Tata Elxsi, came out with decent numbers and should look to improve. The only other stock that still is holding up a bit is KPIT and one should watch for its results. Chart 4 shows the IT index set up on weekly time frame.

Other than IT, the other sectors generally faced pressure and here too we may have to wait for some bailout from stocks from every sector.

The situation with the MidSmall 400 index (chart 5) doesn’t look too good as of this week. Will need some big hitters in results to take this index out of the mud it is getting into. Watch closely, because sentiment is considerably arbited by what happens in this area. As can be seen in the chart, the good support is still some distance away below current.

So, it is a week to watch before we leap. We will have to be very, very selective about plays that we get into, especially for trading. The current market is a pop-n-drop type. Moves don’t last even if there are breakouts or breakdowns. So quick in and out moves are suggested for traders. Investors need to pick and choose their game.