Nifty This Week In Technical Charts — Market Narratives Are Shifting

Last week was a bit all over the place. Beginning with a deep cut on the back of Powell-speak, the market managed to recover. That emboldened everyone and led to the feeling that India is on a different wicket completely compared to the rest of the world.

The following day saw one of the most robust advances of recent times. Bears were put to the sword on Tuesday but the holiday in between dampened the sentiment a wee bit and the balance two sessions of the week were indecisive affairs. In sum, one would have to state the bears tried but simply couldn’t force the pace. This was, more or less, the view that I had carried over the past two weeks—that the trend (to paraphrase James Bond) was ‘stirred but not shaken’!

Usually, I feature the intraday chart of the Nifty as it played out through the week. But this time around, I am featuring the chart of the Bank Nifty of a similar type. See chart 1.

The initial portions of both the Nifty and Bank Nifty are similar (big gap down and a steep climb) but it is the later move that makes BNF chart more interesting. This index, usually the much more highly traded name, managed to retain the gains made during the recovery of Tuesday whereas the Nifty lost a good bit of it by the end of the week. So, clearly, the financial space is something that is leading the markets just now.

This is also evident from another chart—a ratio chart of Bank Nifty versus Nifty. Can see this in Chart 2. Here one can note how the trends for the ratio chart is clearly suggesting that Bank Nifty may continue to out perform the Nifty in the coming week as well. The bank index had started out performing the Nifty from around end June, went through a bit of consolidation (i.e. equal performance) into early August and has now picked up trends once again in the last week.

We know that the last several weeks has seen public sector banks do very well and most names had bounded up sharply. But towards the end of the week, we began to see some money returning to the private banks and a ratio chart of PSU and private banks also is suggestive of a possible shift back to private banks in the week ahead. See chart 3 for the ratio relation between these two banking indices.

If private banks are to rally, then the focus should be on ICICI Bank and IndusInd Bank as the top two performers currently. HDFC Bank is fast catching up after being a bit under for a while so would be a third. But Axis Bank and Kotak Bank are lagging the trends of the others. If you were to add IDFC First along with these top names, then that too is in sparkling form, trend-wise. Will PSU banks then not fare well? That may not exactly be the case. They may continue to do well as the trends there are pretty solid too. But moves there may become more selective, is what I feel.

Last week, I had spoken about the situation with respect to sector indices and how they largely indicated a continuation of the up move. We continued to see improvements in most of the names mentioned as doing well. The two prominent indices that were mentioned as being weak (IT and pharma) continued to remain in the dumps and were losers for the week and the month. The retail trade was in the market once again and we find the mid- and small-cap indices were gainers for the month of August. Realty was in great form and is seen charging higher and the breakout we saw in the last week can probably herald continued advances in the stocks in there.

With no immediate triggers available locally (next results flow would be in second week October or so), attention may continue to be on the U.S. markets. Featured in Char 4 is a comparison of Nifty and the S&P500.

You will have to look at the chart a bit carefully. The candles in black and white is the S&P500 index while the green-red candle is the Nifty. Over the last two years, there has been a pretty strong correlation between the two indices. Even right into the June 2022 low. But looking at the post June-end low, Nifty has started strongly outperforming the S&P500. Two resistance trendlines are drawn and one can note that the line of the Nifty is a lot flatter compared to the one on S&P500. It is, therefore, evident that the Nifty is now tending to peel away from the U.S. markets and that can take us into a totally different realm. Very interesting situation and we need to see if this variance persists because it could point to something significant for the future.

Why all this time spent on relative analysis, one may be wondering? Why not just look at levels for the Nifty or Bank Nifty and go bang-bang? Well, there are times to do that and there are times to study the narratives. Right now, the market is in a state of flux. Valuations, trends, speed of moves, lack of corrections (or limited-ness of it), FII flows, quarterly results, fear of missing out, fear of heights, etc. are all mixed into the gravy right now. That cannot make for too much of clarity. People are looking at all kinds of relationships and the problem too is that those very relationships themselves are in the process of changing. Hence, one has to pay very close attention to what narrative the market whispering right now. My effort every week is to understand the market’s narrative and try to match it to the narratives that everyone else (TV, print, WA, Telegram, websites, etc.) are putting out. When the two match, some trended moves shall occur. When they don’t, some seemingly random moves will occur. But there is seldom anything random about the way the market moves—there is always a pattern. How quickly we are able to spot it is really the name of the game.

So, right now, I feel that the market is shifting gears. I have already spoken about the likely action that the domestic funds may take. I have used the observations on the sector indices to build a narrative of my own, which I hope shall resemble the eventual narrative of the market. In line with this, I remain a buyer on dips for both investing and trading. In trading, I remain active but confine my focus to very trended stocks (largely up-trended), while in investing I am looking at where Q1 has thrown up some nice winners. I am also looking at stocks that have done very well during the bullish phase of 2020-21 and where the price damage has been quite limited. I reckon if people who bought into such names are so reluctant to give up on those, those stocks may continue to do well when market pushes higher. So, it is a mixed approach and driven by the market’s narrative rather than any specific fundamental or technical views.

In August, option writers were badly squeezed and this kind of action may probably increase in occurrence in the near future. In a trend devoid of too much clarity, squeezing retail short sellers of options is one of the low hanging fruits. So, those engaging in shorting options as a means of a livelihood in the market—particularly those with very low capital—are warned to find a different vocation.

For the numbers, 16,800-17,000 continues to be a strong support zone that may be tough to break. Similar support in the Bank Nifty may be around 35,500. These trailing stop levels for positional traders.

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.