Nifty This Week In Technical Charts: Ranging Week Ahead

Unless Friday's rally endures and persists into the next week, it becomes just a small pop for multiday traders.

Stock trading tools on a monitor. (Source: Pixabay)

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The September series saw a poor end as prices plummeted, losing about 550 points at the low on Friday morning. It recovered post the RBI policy as the expected 50-basis-point hike was delivered but the governor managed to apply some balm on the wounds with his statement.

People focused on the statement rather than the hike and short-covering emerged to carry market higher, saving some blushes for the week. Otherwise, it was a rather dismal performance with the market beginning with a wide downside gap and then persisting below it through the week. The rally of Friday would, therefore, have come as a big relief.

In last week's article, I had spoken about declines to occur and hence, ideally, one should have been prepared for the kind of fall that occurred. In terms of the pattern, the fall was much larger in price and time than any of those seen during the rally from the June 2022 lows. Thus the swing was clearly changed. Forewarned is forearmed, as the cliché goes, and since the readers were warned to expect this, it is hoped that they would not have been caught unaware. The intra week move is shown in Chart 1.

As can be seen on the chart, prices were gently but firmly down all through the week, throwing out some bottoming signals towards the latter half of Thursday as the rollover got done.

The rally of Friday has managed to reach the overhead resistance trendline on the intraday charts and is also seen nearing the big gap resistance zone, left at the start of the week (17,180-17,300 area). This will be the main resistance zone for the stock, and if crossed successfully ought to see a quick spurt towards the 17,700 levels in the days ahead. All these will, of course, require some help from overseas markets not tumbling any further. The Dow should hit a support zone around 28,500-28,200 and any recovery from there would help the cause of the rally here too.

The RBI policy has been announced and the expected 50-basis-point hike has occurred. Since it was already factored in, it had no negative effect. Instead, the market has chosen to focus on some positive commentary by the governor and pushed the indices up nicely from the lows.

If we look at today's price action and the rollover data, which showed that the FPIs had a large index short positions as well as a net stock future short for the first time since November 2021, it is easy to conclude that Friday’s action is largely short covering by the FPIs mixed with some relief buying by local traders.

Retail had a substantially larger long stock future position and I expect a lot of this was pending longs, which will now act as an overhang as prices move up. So, short-covering from one set of players offered long liquidation chances for another set. Net effect will be to reduce the overall position in the market. Hence, expect the market to turn neutral and range-bound in the next week.

Looking at the charts of the heavyweights of Nifty and Bank Nifty, one doesn’t really get a sense of any bullish trend strength in them and hence, this also points to the week being a range-bound one. Typically, when a near-term bottom has been hit, the market consolidation that follows is speckled with stock-specific plays and this is what we are likely to witness in the week ahead.

Options traders were quick to seize the opportunity on Friday and the PCR doubled from 0.6 to 1.2 during the day as put sellers finally saw some favourable trends after getting a pasting on the prior four sessions. That the sentiment was not overly roiled was also known from the fact that the option open interest on the new October series continued to be firmly biased towards the upside as Put shorting dominated.

Now, that may be encouraging to some but it also leaves the trends a bit vulnerable to downside pressures. So we do need to watch the progress of events and prices during the course of the week.

But if one observes on the daily charts, the market has been largely unchanged across a year now. The Nifty was at 17,600 in September 2021 and it is near those levels now as well.

No doubt, we have been traversing up and down during the period but there has, overall, not been any trend over the long term, so to speak. The right way to see this data may be through a read of the monthly chart. This is featured in Chart 2.

We can note the ranging at the high levels and the very limited price damage that has occurred so far. When we are in a bit of a doubt about the trends, it is always useful to go and get a perspective from higher time frames.

Note in the chart that the oscillators, too, are not threatened in any way and continue to retain the bullish nature. The Ichimoku lines, too, are decidedly positive status. Comforted by this fact, we can now look upon the short-term forays as a series of retests of the bottom of a wide range. This is, of course, relevant for a longer-term player. It is not possible for day or few day traders to withstand the gyrations such swings represent.

In an earlier article, I had mentioned that longer-term players need to rework their stop loss to near 16,800 levels and the recovery from near those lows to close the week better seems to have saved the stop from being triggered.

As a practice, long-term traders should always have stops on weekly or even monthly close basis. Since the week, month and quarter have coincided in the last week, it was even more important to have a stop on a closing basis.

Now the debate will shift to whether a durable bottom has been made or not? My answer to that is both yes and no. One has to understand that the words ‘durable bottom’ can carry different meanings for different sets of people.

For an active trader, any oversold zone that can create a pop upward can be said to be such a bottom. But that would not be so for a multiday trader or a multi-week swing trader. Hence, the divided answer.

A straight drop for six to seven sessions took the indices to oversold zones and probably created the nice rally of Friday. For a trader, the 450 point- 2.65% rally in a single day makes for a great outing. But unless this endures and persists into the next week, it becomes just a small pop for multiday traders.

Both Nifty and Bank Nifty have room to the downside (16,650/37,100) before they hit good retracement zones. The down move so far is a single leg down.

Typically, a good correction unfolds in three legs (most of the time). So, I believe the correction is not yet done. The momentum indicators on daily charts need to flip out of their negative status and perhaps show a range shift as well. The time count for the correction to complete is scheduled for Oct. 11.

If readers recall, the previous high was called for Sept. 13 and that was the precise date for the Nifty top. There is no major news or events set for the next week to 10 days. Therefore, global news flow will hold forth and create volatility with many opening gaps perhaps. In one of those volatile legs, I expect the Nifty to hit down to do a retest of the bottoms and the record a durable low.

So, with an expectation of a volatile market for the coming week, I would be looking to reduce my trading adventures and wait for a more confirmed signal of a low.

Last week, I had specifically mentioned that investors need to stay away. I continue with the same view for the coming week as well. There shall be plenty of good opportunities that will get thrown up later. No need to push it. 

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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