Nifty In Technical Charts: Expect Higher Bottoms To Form Now

The Adani saga ruled the week. We already had sampled it in the earlier week. The start of the week was sedate enough and on Wednesday, when the issue sailed through, most people felt that the matter was now done and over with. Hence, they were all quite unprepared for the kind of volatile moves that emerged thereafter. The budget on Wednesday also played its part, creating a feel-good factor in the market and helping to hoist the Nifty all the way towards 18,000 levels. But the Adani matter returned with a ferocity that busted all hopes. Following a note from CS, the Adani Group almost spiraled out of control. Recovery occurred over the next two sessions but not before Adani hit down an incredible 40% in a single session and recovered almost the whole of it in the same session! For those who love volatility, this week was orgasmic!

Chart 1 shows the movements captured by Gann angle lines from the October bottom. It can be noted that the prices, despite the volatility, came to rest on an angle. Some earlier tops and bottoms of the move are also marked where they interweave with the price and time levels rather nicely. Based on this chart, the next week's move may be confined within 18,100-17,450 price zone with Feb. 17 coming up as the next important time window.

If I step down to a lower time frame chart to check for more detail, I find that the support moves up some, as we can see that all the bottom forays ended as lower shadow candles near the 17,530 area. See chart 2 (60mn Nifty). So, we can probably revise the support levels there. Time count wise, we have Feb. 7 and then Feb. 13 showing up as important time deflection points.

On the top side, we have resistance angle that would need to be taken out for move gains, but the top end seems to be around 18,000 levels. So, on the smaller time frame, we get 18,000-17,550 as the possible range for the coming week.

Using the same approach, I look at the 5-minute chart, using a rising angle structure—presuming here that the rise from the multi supports of the week has started a rally. Here, too, we can note that the 18,000-18,100 area may prove to be difficult.

But this chart offers a stop-loss for those who have already created a long position. The lowest angle on this chart is cruising at 17,700, starting next week. So, the stops can be placed here or beneath. If this happens by 7th, then better not to carry longs until the bottom area is tested once again. 

We have seen substantially higher volumes during the week but the prices have moved both ways and finished better. Since our view (see last week's letter) is that the market may have put in a low, I will treat the volume to be a positive indicator for now. Hence, I will look for formation of higher bottoms now if there are intraweek declines.

In last week's letter, I had suggested that short positions should be covered and the market did give us good opportunities to do so. Now, I would be inclined to create long positions, using intraweek market dips to create and add to positions. 

Some trend analysis here using Ichimoku may be in order to gauge the type of moves we may have ahead. Chart 3 shows Nifty daily with Ichimoku, RSI and DMI lines on it.

Prices are below the cloud, but notice that despite a strong break (Jan. 27) and another attempt down (Feb. 1), the market has been unwilling to follow through lower. Prices have been hugging the TS-KS lines during the week, implying some sideways trend, rather than a severe collapse that was feared by the players.

The inability of the CS line to penetrate the cloud can also be considered as weakness of the bears to force a downtrend. Divergence in RSI is visible and follow through to the upside to take the prices to negotiate the upper cloud.

If this happens swiftly in the coming week, then the cloud is thinning out midweek and should be easy to break out. So, that is something to watch for in the week ahead. However, if it misses that window, then it may become a bit more difficult as the cloud thickens further down the road.  The DI lines are negative and need to cross to produce momentum strength for a rise. Again, failure to achieve that will lead to consolidation ahead.

Note that the cloud travels at around 18,250 area and if it has to be taken on, then the earlier mentioned weekly range has to see a breakout. This is how market trends dovetail—one signal will set up another and the art of chart reading is all about joining multiple points together to form a composite picture. 

Now, an analysis of the prior week’s moves cannot go without Adani stocks being mentioned because they were at the root of all the moves! So, here is a look at Adani Enterprises (chart 4).

This chart shows the moves of the stock on Friday as it slammed down 40% in a single session. I have annotated the chart with a Fibonacci retracement of the entire advance from the 2016 low. We note that the low slammed straight into the 78.6% retracement level, forming a nice bottoming tail, a nice hammer pattern.

I had posted this chart during the day on Friday on my website column, suggesting people should now nibble at the group stocks as a bottom was forming.  By the end of the day, stock had almost completely erased the huge loss and that certainly brought a sigh of relief to the sentiment and every other stock also rallied, taking the market to a good finish. 

Sentiment is currently almost completely governed by what happens to the Adani stocks. It is curious that on Wednesday, the note from one foreign brokerage broke the good cheer created by a good budget and took markets down, and on Friday, another note by two other foreign brokerages on the same bond yields created a flurry of short covering.

Are we still harboring such a colonial overhang that we chose to believe the words of foreigners over our own? LIC, SBI, rating agencies, broking houses, etc., had all stated unequivocally that they faced no fallout from the price declines of the stocks—but no one wanted to believe them. The minute a note came up from the foreign broking houses, it became gospel? Sad commentary on our faith in our own.  In the meanwhile, Hindenburg probably laughed all the way to the bank. Who lost? Scores of local traders and active investors. 

After the frenetic activity of the past few days, I think the Adani news will slowly recede into the background. The kind of sentiment hole that they have dropped into will be difficult to climb out of quickly. The opposition parties have taken it up and now will make some noise. SEBI will be asked to intervene. All kinds of strictures (margins, move to ASM, etc.) will lead to reduction in activity. Adani guys will spend time explaining away to all and sundry that everything is okay and waste their valuable time. Media will keep pecking at it until viewership persists. WhatsApp groups may slowly drop the relentless barrage of messages as people will get fed up. Most were voyeurs rather than participants anyway. The market will just move on to other things. Sentiment will ebb back to normalcy and search for the next trend-influencing item. 

From a price point of view, the stocks may look attractive. But remember this—stocks are valuable only if they go up. Seems to me that the chances of big gains, once the ‘value picking’ is over, are slim. Everyone is looking at the stock prices from the lens of two months ago. That won’t hold—not for the rest of the year perhaps. Good for trading for sure, but not really for investing. 

So, the best thing to do is to look for some investment candidates that may be getting thrown up by the budget as well as flow of results. You do find some good ones in there. Play those.

Our overall view in this issue of the letter is that index will attempt to create higher bottoms during dips. So, that makes it a buy-the-dips market for traders. Not too much room on the upside, as we saw with the charts earlier, so be quick to take money off the table, too, when you see some.

End of February prices may be better than the beginning of February prices. Option traders can possibly use that viewpoint to plan their trades for the month. 

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.

Disclaimer: Adani Enterprises is in the process of acquiring a 49% stake in Quintillion Business Media Ltd., the owner of BQ Prime.