Nifty This Week In Technical Charts: Weakness Ahead For Next Week

In the last week's article, I had alerted readers about the risk that was present (mainly from global factors) for the trends. In fact, an earlier letter was titled ‘The Narrative Is Shifting’ where I had mentioned that the undertone of the market was changing ever so slightly. I followed that up with another alert in the article a couple of weeks ago, ‘Targets Met And More’, where I had mentioned that the Nifty topping time zone as Sept. 13. Of course, these were alerts for those with long positions to be vigilant, and in the last week's letter I had also mentioned that in the event the market turned a bit soft, long-holders should lighten up on their commitments. On the make-it-or-break-it matter, the market seems to have chosen to, well, not make it so far.

Why am I pulling the punches here, one may well ask? It is mainly because, even though there is a decline, the price damage is yet quite limited. I have maintained even as recent as the last article that the main support for the Nifty lies just south of 17,000 and still the market remains far from it. Agreed, 300 points is nothing much if the proverbial dung hits the fan but so far that hasn’t been the case, has it? In fact, our markets seem to be shaking off the attempt of the bear hug from overseas and bulls are still out there, fighting to hang on to their gains.

Banks finally surrendered a bit but only after they hoisted the flag atop the new high mount! Since they were propelling the Nifty ahead, there has been a bit of a retreat. How bad was it? For day traders (with longs) it was bad. But for swift players, who flipped out to shorts, it would have been a nice week! Chart 1 shows the moves of the Nifty through the week. A sedate start on Monday, some ratcheting higher on Tuesday that lulled everyone into complacency perhaps and then a slide which turned into a small rout by Friday.

Is the venom spent then? These days it doesn’t take time for traders to dump their positions quickly and this often gets the market light, ready to respond to the next trigger. Will it happen again next week? Since Banks have been leading the charge, let’s look at the Bank Nifty chart to see where the next set of supports are. Chart 2 shows daily Bank Nifty, with some zones drawn and the Ichimoku indicator added. At the top we have five small-body candles after the new high was made—certainly not bullish stuff. The U.S. market weakness dealt a blow by Thursday and that did it. Now, we should head down into the zones marked, the second of which coincides with the cloud (near 38,500 area).

That would represent a 38% pullback of the rise from June 17 low- nothing really very serious. If I were to look at the Nifty, it has already hit the levels of the cloud and may dip a bit into it if banks were to slide some but I feel that the other sectors in the Nifty may take over and save the day for the Nifty. Would look at IT to rally a bit (on the back of some decent numbers from Accenture and a general oversold status of main stocks). Autos and FMCG are also doing OK and should help save Nifty from the blushes. So it is possible that banks may receded but others may fare better. The support on the weekly Ichimoku chart is still present at near the 17,050 levels and is expected to hold. While we are on that point, it is worth mentioning that the support on weekly charts for Bank Nifty is placed around the 37,100 area. It doesn’t seem like it may need to drop that far to seek support and hence we may have only limited declines from banks ahead.

But just because the market may hit supports is no reason for it to start rallying immediately. It can simply get into some consolidation. Chances for sentiment to improve seems limited because in the last week as many as 10 countries raised their rates! India is expected to follow suit as well but that is in October first week. It may take a while for all this rate hike thingy to get digested and during that we may get the monthly expiry done with, there may be some NAV ramping attempts for the first half, perhaps. In the last week's letter, too, I had mentioned that a failure to make it could lead to consolidation. The lack of force in the declines and the nearness of the supports is the main reason why I stated earlier that the market has just decided, for now, not to make it. There needs to be a lot more evidence to show that it is breaking it. We are not there yet.

A source of worry could be the continued strengthening of the dollar. The DXY, for instance, moved further ahead into the trend it has been exhibiting for a while now. See chart 3.

Now, that is a pretty bullish looking chart, if you have seen one! Nicely trended on all the Ichimoku lines. So, the RBI is going to have some fight on its hands, it appears, as we move ahead. Our markets don’t like it very much when the rupee weakens and there is, generally, a middling inverse correlation between the Nifty and the DXY. This can be seen in Chart 4 where we find the linear regression slope of the DXY is decidedly upward. From the October 2021 high, the Nifty dropped as the dollar rose but in the post June 2022 rally, the two plots ran together (when the decoupling story emerged). In the chart, note the shaded rectangular area, it does seem like the Nifty is ready to get into some inverse moves with the dollar once again. So, do be watchful of further dips in the coming weeks tripping up sentiments. Compared to the decisive buying the FPIs showed in August, they have been less enthusiastic in September and if the currency weakens, they may want to fold their tents for the moment and wait it out.

Among all the factors, I feel the rupee weakening could be the one to spook the market the most. This is owing to the fact that, even though most people don’t know squat about the subject, instinctively, every chap feels that a weak rupee is not a ‘good thing’. And many of them have very little clue about what the RBI is doing about this. When you have only a very basic idea and no more, one tends to create some stories, usually the bearish kind. Mix this in with the interest rate hike stuff and that is good enough for some fear mongering. If, alongside, there is some slide in the U.S. markets, then operators may just have a field day or two in the week ahead. So, be ready for a couple of problematic days next week. Trouble is, monthly expiry is coming up and that kind of forces the hands of many small traders who may get pressured because of lack of capital and be forced to throw in the towel. 

Therefore, while support levels may not be far and indices could get saved by a sector or two, individual stocks may not be spared the stick. I had warned in the last letter that long holders need to check their positions for conviction in their longs because testing times for traders could come up. This situation is a bit more accentuated for the week ahead. Hedge shorts may be in order to salvage some mark to market payments if one is determined to hold the longs. Consider that.  Would it be a good time to look for some bargains for investment? Perhaps. But I would suggest waiting for Q2 results to start flowing as that may throw up more names and one can invest with some more clarity. Keep the powder dry sort of thing, you know.

For those that are not active on the markets it is best to just take the week off. Since the view is to invest only after Q2 results start flowing and since such people don’t really trade much or look at support-resistance levels anyway, little shall be served by being close to the market. Time shall be better spent, for them, elsewhere. But for those that are active, details have been mentioned earlier already and they had better gird themselves for a week of weakness that they may not have seen since mid-June. 

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.