Nifty This Week In Technical Charts: Dips Still Remain Buys

There was cheer all around as the main indices—Nifty, Sensex, Bank Nifty—hit all-time new highs. Did we hear people rejoice? No. Surprising, right? Such an event should ideally have investors popping the cork on the bubbly but there certainly was no celebration in the market.

The main reason for this is the state of portfolios of individuals. Most common folk hold small-cap stocks in their portfolios and the one-year return there has been a negative of about 10% in contrast to the Nifty where the one-year return has been around 7.4%.

These are basis the small-cap index but most people hold stocks that don’t make it to the index and hence, those returns may be even worse than these numbers.

All the same, one can still be a bit happy about the proceedings because it is seen that after the main indices reach new highs, there is always some positive fallout on the mid and small-cap stocks and hence, if the market remains steady, the chances of a rally in the small and mid-cap space may soon emerge.

Signs of that were already starting to manifest towards the end of the week. A bout of good news ought to help matters along, especially, since the Nifty seems to have hit some resistance levels. Hence, the pace of advance here may slow down. But there is nothing negative in the environment to create any declines and hence, the main indices could remain steady.

There are enough positives around. Dollar index has pulled back and hence, weakening rupee scenario may recede. Oil prices have also dropped, providing some positives. GST collections have continued to remain high. Petrol sales have moved higher by 25%, that too in November, when the festive season is pretty much done. This clearly indicates that the economy is on a good footing. PMI numbers came out good. The U.S. Fed is making amenable noises of tempering the rate hikes and the expectations for the upcoming RBI meet are also tempered. The FPIs continue to be on the buying side, having bought a decent lot in November, etc.

Given these factors, the markets are refusing to decline. Large-cap stocks are moving higher slowly and selectively, but their collective action on the indices has been quite positive. So, that is at the larger perspective, which anyway, I have been averring is quite intact, making all dips as fresh buying opportunities.

But that is so much easier to say than do! For, who is not nervous about the high levels reached? Every third person you meet or speak to is asking the same question—when is this market going to correct/decline/crash? The severity of the expectation is only determined by the size of the portfolio!

The simple rule of analysis has always been that so long as people expect a strong reaction, it never shows up. It kind of sneaks up on you when you are not really looking for it or have turned confident that it will not do so.

So, let's check out the shorter time frame to see what we should be doing with trading positions. As ever, we start with the movement over the week as seen through the intraday charts. See chart 1. This time, the chart is Bank Nifty, which actually had a more torrid time compared to a reasonably linear time for the Nifty.

I feature this index to highlight the point that even though the Nifty was up on most days of the week, traders are more active on Bank Nifty and here, they faced some volatility and therefore, making money may have been a bit of a challenge using directional ploys.

Private bank stocks disappointed, remaining choppy through the week. Some face-saving advances occurred on the last couple of sessions in the PSU banking space, saving the sector some blushes. Even at the end of the week, the indications are quite clear that the Nifty remains in a better trend status compared to the Bank Nifty.

But what of the Nifty itself? Chart 2 shows the set-up there. All sorts of possibilities exist right now, it appears.

Prices are progressing steadily along a rising channel but are hitting some Fibonacci ratio levels, projected using component swings of current price action. Momentum has kept pace with the price advance (see RSI chart on lower panel) and hence, there ought not to be any bother for now.

But the support line of the channel is not too far away and hence, we do need to be on toes for some short-term pullback in case of break of the same—currently at the 18,500 area. But with the RSI reading placed as it is on this chart, any such decline would still present us a buying opportunity. However, it is quite likely that such a break could carry the Nifty lower to 18,100 or even to 17,600 area, depending on the trigger. Ergo, no major rush to buy on a break of the trend channel. Shorter term players can set a trailing stop at the support trendline.

Next question to ask would be whether the support line could break? For that, we have to check the lower time frame chart. Chart 3 shows the Nifty 60min chart using a Linear Regression channel, using a 2-sigma widening to draw the channel.

I prefer to use this method rather than a Bollinger band for e.g., as the channel width doesn’t change and gives one a clearer idea of relative price action. It is noted in this chart that the prices had reached the top of the channel and hence, suffered a reaction.

Prices are well-confined within the channel and the addition of the RSI to this chart also seems to suggest that a break may not happen, as a positive reversal signal is also visible. This is one further confirmation that we should be buying dips ahead.

Having settled that, let's look at higher levels’ possibility. Immediate targets are around 19,075/19,190. This is a cluster area for the Nifty using several different measuring methods. So, let's take it one step at a time and aim for these levels. From a trading perspective, those ought to give decent returns to traders.

What sectors can participate in a rally ahead? News about China loosening the lockdowns and gradually opening up ought to be positive for metals. The Metal Index chart is already looking up. See chart 4. Prices are about to take on the median line resistance and momentum strength is clearly visible so there ought to be some continuation.

While IT stocks have begun a rally that has seen quick short-term gains accrue for players, its pace may slow down, although it may continue higher. Better tidings are visible in FMCG sector and stocks here also carry some weight on the Nifty and hence, a run here could also help the Nifty stage gains.

So, we conclude with the same advice as earlier letters—continue to be buyers during intraweek dips. Select stocks are likely to do well and metals, realty, IT and FMCG are likely to be in particular focus. PSU banks' trends are still pretty good and several of them can be expected to continue their performances.

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.