Nifty Technicals: Bottom To Be Formed Early In The Week

It was difficult to make out where the market wanted to head. At the start, the gap created over the weekend ensured that we would see a gap up. Ideally, that should have carried ahead nicely and taken markets higher. When prices started trading above the gap are of Aug. 26, the feeling was intensified. But no sooner did it attempt to continue higher than selling emerged and trimmed the gains of the earlier day. As a result, the market ended a bit uncertainly, although it finished in the green. Chart 1 shows the intra-week movement of the Nifty. The gains through the week have created a bullish candle for the week for the Nifty as well as the Bank Nifty.

While the prior weekend had created an upside gap possibility, this weekend is showing the opposite—a downside gap likelihood. If one takes a look at the SGX Nifty as it trades six days, we see a different picture of a bearish candle! If the market now opens lower and trades lower, then it will have to deal with the wide gap created on last Monday, with a gap low at 16,900. Such rapid swings in the short-term trends create tremendous confusion and traders have a very tough time winning by design. In the last week, call shorts probably booked one of the highest quantum of losses.

Chastened perhaps, by the recent experiences of option shorters getting a tremendous whack (last couple of weeks, in fact), it seems like option traders have taken a more balanced view and have created positions on both sides of current levels. The PCR reads at 0.77/0.85 for the two indices and that is neutral territory. The OI at the current levels is about the same and change of OI for both calls and puts too are similar. Situation is similar in the Bank Nifty as well. So, it seems like traders are on a defensive positioning and want to wait for market cues to shift their balance in the next week. Option players are therefore unlikely to get pushed into any panicked situation even if there are gaps.

Now, next to the important levels for the two indices that we need to watch for.  Since the last downward foray had met with some consistent demand around 16,800-16,850 area and the gap support is present at 16,900 area, we can expect that zone to be protected ahead too. On the higher side, the 17,400 has been a resistance bugbear for the Nifty for long and, hence, that too will be tough to take on without additional positive triggers emerging in the week ahead. These are shown on Chart 2. Since the prices have already hit the resistance level in the last week and are seemingly in a retreat, it would seem logical to consider that the Nifty may reach or attempt a test of the recent support zones as mentioned above.

All through the last many months I have steadfastly maintained that the longer-term trend is not disturbed for the markets. Those that fear every turn in the markets (after a rally) should have greater faith in the robustness of our markets. Call it decoupling, call it new money inflow, call it change in India fundamentals—it doesn’t matter, because it is a different reason for every person. Collectively, there is no willingness to abandon any built-up positions. FPIs sold but the rest of us were more than a match for them. Now they are buying and that is shoring up the trend. If they sell again, the cycle of domestic and retail buying will surely repeat. So, I wager that this would continue even further.

Hence, all these fluctuations are for short-term players only. Volatility induces a fear element and we have had a few of those scares in the last few weeks as market gyrated to global events. But I would think that may come to a halt with the commencement of the local news cycle—the Q2 results. As usual the IT biggies will start the show from early this week and if those come through well, we can have a quick mend to short-term weakness. Trend strength build would depend much on how the results would unfold. But looking at various associated factors in the economy, I am not really considering any nasty surprises. There may be some at individual stock levels but that shall always be there. Overall, I would believe that a low would be put in early in the week and the indices would start off on to a rally.

There should be sufficient time to get into good stocks so there is no need to hurry into any positions. I had mentioned two weeks ago that investors should take the time off as volatility was expected and I hope they took that advice. It would now be time for investors to return to the market—not to invest right away but to watch as results unfold and then latch on to something that surprises the market. It requires some patience to wait for opportunities to show up and one needs to be alert to spot them when they do show up, so don’t be slack.

One of the sectors to concentrate may be capital goods. The year-to-date gain in this sector is around 11% with equally impressive returns for three-year and five-year periods. With manufacturing improving, govt policies favouring and companies announcing capex plans, the outlook for cap goods manufacturers seems to be quite positive. One can watch for results from this sector (among others, of course) for good investment picks. The long-term chart is very positive for this sector. See chart 3.

There is also a lot of excitement about pharma counters and since they have been down for a year or so, a lot of people are finding value in them. Some fishing has occurred and prices have advanced to above the intermediate resistance trendline. Two stocks from the sector clearly depict trends—Cipla and Sun Pharma. Others are rallying with the light shining on the sector. Looking at Chart 4, I feel there is much to be done before matters can turn for better. So, if one is interested here then better to stick to the two leaders. 

So, to sum up, I would be looking for a decline in early part of the week, that at worst come down to test the recent bottoms but not really break them. Q2 results roll from Monday onwards, so market may shift its focus from overseas events to local news. This will reduce the high volatility regime and perhaps shift to a more orderly movement. Buy the big dips is still the mantra and it is now time to put on the investor hat and look at the market from that angle. Traders can await the formation of a low in the week ahead and then look to trade longs in sectors that get patronised in the weeks ahead. Investors will ensure the fuel while traders can drive the quick tides that get created as investors buy into those performing well. Leaders that do well will immediately get favoured and would be relatively easier trades. For the start of the season, simply ignore the ones that don’t report good numbers. Negative conclusion is to be drawn, if at all, only after a majority of results are out.   

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.