Nifty This Week In Technical Charts: Inflection Point Coming Up

Even though no one wanted it, everyone was waiting for it! The dip, I mean. Friday’s trading confirmed the fears that most were harbouring, that the market was ‘due’ for a decline. As though it was some train that had got delayed or something. So, when it showed, everyone was, like, ‘I told you so’. Now, will come the next set of comments, predictions, new questions etc. But before all that, let’s just take a look at what has transpired so far during the week. The first chart details the intra-week move..Friday’s fall certainly looks to be the dominant part of this chart. It slashed the gains of the week, for sure, but the gains have been in progress for several weeks now, from June 20, actually..So the first message is that the decline has to be seen in the context of the entirety of the advance rather than erasing the gain of the most recent week..This fall is not exactly the first of the ones that the market has seen. The second chart shows multiple pullbacks of some dimensions from the June 20 low. The current one is along similar lines to the one we saw on Aug. 4 and in fact, the earlier ones have been larger than the current one..The point I am trying to make is that just because everyone was waiting for a drop does not make it a more meaningful one. It becomes so only when the price and time element exceeds the prior corrective moves seen during the advance. Hence we have to treat this one as yet another normal market correction.If we move on to the daily chart then we get some additional info, with a Pitchfork channel (Schiff) and with the RSI indicator added..The rise was slam dunked at the top channel, an expected resistance zone. We have a long-body bearish candle for Friday. So, a good signal of a top having been made? Possibly. Looking at the RSI levels, we note that they were deep in the overbought zone (something we discussed last weekend as well), so, supporting the evidence of the market at a potential reversal point.The question raised last week still remains, where is the divergence pattern on the RSI? Usually, such sustained advances do not end without creating a divergence pattern. No reason to think that it will be different this time. Overbought, yes. In line with that, some pullbacks can occur. But a reversal? Not any evidence of that as yet. One immediate argument would be to state that the intraday charts, say 60-minute, showed distinct divergence across the week. But that is just the problem with divergence patterns- they can show, and the trend can continue to run for some more time!.The trend reversal—on intraday charts—has still not occurred, because even here the support trendline is not yet broken!.See the fourth chart for details on this aspect..So far, we have not gotten anything saying the trend is reversed. Time for us to visit the weekly chart as we haven’t done that for a while. The fifth chart shows the same..The first rumblings of suspicion begin to emerge here! Note two important things in this chart. The prices reach the main resistance trendline (coming off the all-time high) and develop a bearish (albeit small body) candle for the week. And, the weekly RSI has managed to drag itself to a level of 60, despite a rise of 18% on the Nifty..While we were all caught up in the excitement of the strong rise over the past many weeks, if the momentum indicator could not haul itself to a bullish mode then we have to think afresh about the trend strength!.Now seen in the light of the weekly set-up, the daily bearish candle (sizable), the resistance at the pitchfork channel, the divergence in the 60-minute chart etc. etc. can all be considered small warning signals for the trends in the coming week.What it means is that if the prices were to continue to remain soft when trading resumes next week, then chances are that the trend may respond more to short-term impacts and continue the correction some more. If that were to extend even further, then very shortly into the future new patterns of reversals shall emerge on the daily and intraday charts. In other words, the market is now in a make-it-or-break-it mode! While we would all like it if the market made it, we also need to be vigilant to see if the market fails to make it. For, the latter would mean that the dreaded correction will then appear.What can argue against such a possibility? The FPI buying spree, for example. People argue that it took $32 billion and 8 months to drop the Nifty by 17% and took just $3-4 billion and 6 weeks for an 18% pullback! Everyone would like to bet on the side of that strength rather than against it, obviously.Another argument could be from the technical side, the scores and scores of upside breakouts that one is seeing on the charts of a wide range of stocks. This implies retail and other money is making a comeback to the market. Then there are macro data to lean against- inflation easing, oil is down, Rupee weakness is passing etc. etc.We need to understand that these are longer-term factors and if they (and others like them) are indeed to play out, it still doesn’t mean that the Nifty cannot slide a bit, do some test of nearby supports and then get back into the uptrend again! For short-term players, every squiggle of the market matters. So they need to be paying close attention to what the market shall do next week and be ready to jump ship if weakness begins to show. It is not as though the medium-term chaps can be relaxed. With an 18% advance in double quick time, they too need to pay attention to the trend since some misgivings about its strength have been raised (vide the weekly chart). Any underperformers in the portfolio, any extra performers too, may have to be shed.So both types of players need to be on the alert for the trading pattern of the next week. We may therefore be at some kind of an inflection point here..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.

Nifty This Week In Technical Charts: Inflection Point Coming Up

The market is in a make-it-or-break-it mode. Players of all time horizons need to be on the alert for next week's trading pattern.

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