Nifty In Technical Charts: Be Alert About More Declines
The drop in the last three sessions of the week took the wind out of the bulls' sails, as prices fell sharply and the Nifty broke and closed below the 18,000 level.
People were slightly lulled by the ranged action during the first two sessions of the week, so they were caught off guard by the consistency of the decline that occurred until the end of the week. At the end of the week, the U.S. markets had improved slightly and the Singapore Stock Exchange was trading better, and there is some hope that order will be restored in the coming week.
Will it? Let us examine the evidence to see if this is correct.
For a rally to occur, several things must be in place. First, prices should have declined into support; next, momentum should be in the oversold area; third, sentiment should be stretched on the negative side; fourth, some pattern should be available to suggest a reversal; and finally, time counts should be in place.
In the case of our market, we have a slight problem because we have the Nifty as the main index while also having the Bank Nifty as the main traded index. Hence, sentiments are expressed through the patterns of the Bank Nifty, while market measures are taken on the basis of moves in the Nifty.
In our analysis, we need to probably look at both and try to take a composite view. But over recent weeks, the Bank Nifty has been out-performing the Nifty and since we analyse the Nifty every time to seek market views, we shall consider evidence on the Nifty chart alone here, with the assumption that the Bank Nifty patterns and signals would not be as bad (on the downside) and better (on the upside) compared to the Nifty.
On the first aspect of dropping down into support, I find that the Nifty is tending to break the intermediate support trendline from the June 2022 lows.
Now there are more ways than one to draw trendlines, and Chart 1 shows a price grid line on the Nifty. Here too, I find that the grid line is broken. Using this very chart, I tweeted earlier last week that prices had taken support on the grid line and would make a brief rally, which they did. But that rally is now reversed, and a fresh break has ensued.
As all the previous tops and bottoms are to be found along the price grid, the current break of a grid line support is to be taken seriously.
The next support line is seen at around 17,720. This is not far from where we are, so we must be watchful for further breaks that could be damaging, sending prices down towards 17,250. Recoveries, if any, shall be resisted along the 18,200–18,300 levels.
Coming now to the momentum, we find the RSI reading has dropped to around 38 levels for the Nifty and 42 levels for the Bank Nifty on the daily charts. This is not an oversold reading, and therefore, if more declines occur, there is scope for momentum to dip further before repair can be affected.
Chart 2 shows the RSI and the DMI indicators. In the latter, we can see a bearish tilt to the trends as the -DI is on top. If prices drop in the coming week, there is a chance that the -DI can establish some kind of dominance, which could lead to sustained weakness. So, combining price action and momentum, matters don’t appear to look favourable for bulls.
Next, we check for any sentiment stretch on the downside, and here we can look at options data. There is a good amount of call shorts created in the system, and the put-call ratio is down to near 0.55, implying two calls for every put.
However, that can certainly be considered a stretch. But the thing with indicators like PCR is that they can change very swiftly (unlike daily chart oscillators, for example). We may, therefore, see an oversold pop on one of the days of the week, but we shouldn’t get carried away by it. The other signals of price and momentum have to reverse if any upside pop is to sustain.
Next, we look for any pattern. According to me, Ichimoku charts present us with the best signals among patterns. Chart 3 shows us the Ichimoku setup.
There are four signals to pay attention to, and they are numbered one through four.
Signal no. 1 is the negative Kumo twist. This indicates a shift in long-term momentum, which is bearish. Unless proved otherwise, one must shelve bullish views for now.
Signal no. 2 indicates that prices have fallen into Kumo support with a flat SenB line. Can this support hold and create a rally? I doubt it, based on the placement of signals No. 3 and No. 4.
Signal No. 3 is the KS Line, which began to tilt down at the end of the week. Now, if prices slide, then we may see a swift decline in the KS line. If prices rise, then we may see them become flat again.
The Chikou span, which is now free of price, is the signal No. 4 line.
the 17,640 area before it can hit support. A decline in prices in the coming week will send the CS down toward the 17,640 area before it can hit support.
The Ichimoku chart shows that there is room below if prices were to go down, but there is a limit to how high prices can go.
Finally, time counts. The rally was not expected to last past Dec. 5, and we have already seen declines starting on Dec. 4. The time count for this week is set for Jan. 11, and the high and low of this date should decide the direction for the coming week. After this, the next date for January is the 23rd. The time count is used to look for some change in direction around that date or for some important support or resistance level to be broken on or after that date.
Sentiment can take a turn after looking at some of the results due in the coming week for I.T. majors. Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., and Wipro Ltd. are due to report their results in the coming week, so all eyes will be on the tech majors, as they can set a trend. Expectations are low, so it may not be too hard to beat them.
Suggested trading action:
Avoid taking any major action, if prices go up. A gap-up opening is indicated by SGX for Monday. The key question is whether it can be sustained. If it doesn’t, we have room for the downside. As such, one should be ready to act for a further drop of a couple of hundred points on the Nifty.
So, while the upsides may be limited, the downside has room, according to the data analysis presented.
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.
