Nifty This Week — Technical Charts And More: At An Inflection Point, Once Again

Writing a few weeks ago I had mentioned that the last time when we saw some more sustained time-wise corrective activity was back in the February-April 2021 window where markets had spent time but not seen price damage. This time, too, it is not too dissimilar. The high was recorded a month ago, on Oct. 19 and since then we have also seen a dip and rally to form a lower top and now another dip. So, now if prices go below the Oct. 25 low of 17,569, then we will get a lower top-lower bottom and all those that are bearish can immediately jump up and say, ‘Run for it. Now!’ Lots of people have been waiting for that anyway. But like I said earlier, we have seen this back in April this year and nothing came off it. That was mainly because there was a pattern but there was no price damage.

No doubt, the rules of technical analysis do say that pattern is supreme. Changes occur in the smaller time frames and burgeon into bigger ones later. So, if the pattern occurs, then it is a warning. But along with a pattern, associated signals have to be triggered as well. When calling for a larger correction, one of the primary elements to look for would be price damage, because that is what would tell us that long holders are determined to sell out, even at lower levels. So, when price damage is absent, we can perhaps even question the pattern or label it as being shorter-term in nature, i.e. below the time frame on the chart where it is visible. Here, in this case, the pattern may occur on the daily charts. Without the price damage, we would have to label it as minor despite the fact that it took several days. See the correction of the last time: it corrected the advance from March 2020 to February 2021. This correction took 42 trading days. Compared to that, the current reaction is 21 days old.

The trendline is also being approached. A fall below 17,500 would rupture this trendline. That would be a second point where everyone would howl ‘gone’. But note in the chart, too, that the trendline had been broken back in April 2021 too—see the dashed trendline. The rise was a year old back then and, hence, the expectation of a dip was high. However, the market managed to right itself and within the next 25 days, pushed to a new high, thereby negating the impact of the broken trendline.

I would believe that something similar may occur this time too. The support trendline is quite near so not too difficult to break. If prices move sideways, they will break anyway (but that doesn’t mean the same thing). To mitigate that the index would once again have to rise to a new high. In my review of two weeks ago, I had mentioned that the prices may not create a new high by the end of the year. I continue to hold that view. But when trends come into some sort of question, I tend to look at the Ichimoku chart. The next chart shows the indicator on daily at the left and weekly on the right.

Prices are down into the cloud, hence at support. So price action should slow down. The Chikou Span line has dropped into the prices signaling the end of momentum. Both of these indicate that the market may choose to consolidate for a while.

The only signal we find is that the prices have broken the Tenkan Sen line, which is in line with the daily chart weakness.

The two charts are aligned as the lower end of the cloud on daily corresponds with the KS line on the weekly. Both these lines are moving up so the support levels are going to be moving up too, through the week. This is good because we may not see much of a decline before the support levels are met.

Now, when the support is reached, it can hold or it can break. For now, I expect the support to hold. Given the levels, if there is a speedy drop, the fall may go deeper before it meets the support. However, if the fall is slow, then it will allow the support to come up and hence the drop may be limited. So how far the market drops, if it does, will depend on how fast it does so.

There is another probability, that the market goes up from here. Now if this happens, then there may be some speedy recovery also. Positions are liquidated, prices are down into good support, a rise will create a regain of land above the TS line. Some good news will be of great help for this happening. So do watch for news flow that can impact the market positively.

The market has a chance to move down towards the next support or it can move up as it is already at one support or it can do nothing and just pass the time with some sideways action.

Now, to some, it may look like I am just ducking the issue here by stating all three possibilities. That is not the intent. Every now and then, the market will reach such an inflection point and this is a signal from the market asking us to be careful and watchful of what we do. It would be easy to misread the market at such times.

This is not to mean that the entire market will be like this. There shall be many stocks that will pull out trends of their own during the coming week. Our job as traders and investors is to seek out those names that shall move consistently this week. When the market enables it, such moves are larger and we end up with a larger profit whether we go long or short in the right direction. However, when it doesn’t, it is a lot more difficult to extract profits from our trades.

Hence, when the market is positioned to move in any one of the directions and all of those have equal odds, we should not go at our jobs as we do every week. Some observations are needed, some additional checking has to be done, some additional confirmation sought, etc., etc. are to be done. I shall leave you with that thought of having to do some extra work this week to succeed.

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 BloombergQuint or its editorial team.