Nifty In Technical Charts: Is The Bottoming Time Approaching?

Timewise, we are entering the window forecasted for the yearly low to be recorded, writes CK Narayan.
<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

The week set off ominously, when the gap down price action of the last Friday saw some aggressive follow through to the downside, persisting for the first three sessions of the week. In the process, the 17,000 levels were broken briefly and the sentiment really hit the skids. Thursday, the market steadied itself a bit and finally attempted a mild pullback on Friday. Net for the week showed losses, for both Nifty and Bank Nifty but hope, as they say, springs eternal in the bosom of men and traders were ready to clutch at the lower shadow candles of the last two sessions as an indication of ‘bottoming’.  If any reader is in that camp, then he is reminded of the saying ‘ missing the woods for the trees’. A glance at Chart 1, daily Nifty futures, will set the mind straight.

The arrows mark the sharp declines that we have been seeing since the top on Dec. 1,2022. There have been a series of them, with each of them taking the prices lower. There are grey ellipses to highlight the mild rallies that emerged at the end of these declines and we can note that those are weak and overlapped affairs, meaning that the rallies occurred only owing to short covering and no real buying emerged at any of the price lows. Therefore, to rejoice on the two lower shadow candles and decent breadth of Friday would be unwise. What you see in the picture is the classic lower top-lower bottom formation of an ongoing downtrend. 

This extract from Neotrader, my own analysis software, shows the status of the index so far, this year (top panel) along with some details of the Ichimoku lines. It is noted that the current Nifty levels are far below the Ichimoku lines on the daily charts and hence, any rally will continue to be met by supplies or resistance. Similar picture can be gleaned from this second extract, also from Neotrader, where we can see the scores of the bullish and bearish trends across three different time periods.

The Ichimoku Multiday Bear score stands out at 70, implying that the down move has strength in the daily charts. The overlapping nature of the decline in the weekly charts has ensured that the positional trade score is limited and is equal at 28 for both bullish as well as bearish indicators within the Ichimoku. This shows that the down move so far has been a choppy one, frequently retraced and betrays a mixed sentiment. Possibly, the consistent selling by the FPIs takes the market lower while the resilience of the domestic funds along with the retail money ensures rallies. The candlestick scores show, too, that the down move is present but is not very strong or sustained. Thus, the two Scoring systems in Neotrader indicate that though the down move is in progress, the bears are not really giving it the charge but as time progresses, the bulls are finding it harder to push the market back up.  

One of the reasons for the bullish thought is because the decline dropped to the 50% retracement zone of the June-December 2022 advance. Also, the market was oversold, not just in momentum indicators but also from the fact that the FPI short positions in index derivatives was at its highest since October 2022. News flow was largely from the U.S. and that was not good and so, it was easy for traders to whip themselves into a bearish mindset. There are always enough people around you to call for much lower levels when the market hits the skids and this time was no different. 

Bank failures are scary things, bringing back frightful memories of 2008, even though the world has moved on much since then. Even as the market saw a short covering rally at the end of the week, the news flow from the U.S. continued to be bearish. The Dow has also retraced to around the 50% level of the last advancing leg, similar to the Nifty. So, it could be said that the Nifty is tracking what’s happening in the U.S. 

Not too happy, though, with the set-up in the currency chart. Chart 2 shows the USD-INR pair compared with the Dollar Index chart. We can note that the rupee has been underperforming the dollar, even as it has slid against other major currencies. Indeed, the USD-INR chart shows the formation of a triangle pattern, hinting at further weakness to come into the INR, if there were to be an upside breakout. The continuous selling by the FPIs is certainly not helping the cause here. If the rupee slides afresh, it will take the Nifty down with it.

So, if it is not some continued news flow from U.S. equity markets, it is possible that a continued weakening rupee may also take the market lower. The Open Interest chart of the Nifty and Bank Nifty show build-up of substantial short positions, as can be seen in Chart 3 (Chart courtesy: Opstra)

Such consistency in the build of short OI cannot be turned around in a matter of a day or two of advances. On the options front, bulls are still seen making a stand at the 17,000 Pe strike, but if the prices are attacked, then chances are it may give way this time. 

Timewise, we are entering the window where I have forecasted for the yearly low to be recorded. This, too, would imply that any rally, were it to emerge here, may not last very long and it would actually be one to sell into. For resistance zones, one could use the Ichimoku levels that are seen on the first table that is attached above. The Banking pack should be watched for weakness to set in as they are leading the sentiment swings right now. The current problems are in the financials area in the U.S. and we now read a report from JPMorgan that some of our tech majors may have to make some provisions for hits to be taken on bank failures or difficulties in the U.S. So, tech stocks could be another weak spot for the week ahead. Ironically, tech stocks staged a rally on Friday and hence, may be devoid of the cushion of pending shorts. Same can be said to be the status for bank majors too. 

Prices tend to fall sharper when there is no cushion of shorts to be covered. Hence, it is possible that the low for the week may be front-ended this week so don’t be lax with trading long positions if you see weakness set in early. The bullish days for the rest of the month (meaning, up days) are set for the March 27-29 window and that falls in the following week after next. 

Even if a low is to be recorded soon, that does not immediately translate into a rise. The annual projection called for some consolidation type move for another quarter. So, that is not very good news for harried or frustrated investors. But see the bright side, you have time to check out the Q4 results that should start rolling in a fortnight from now and be able to pick and choose. To every issue, there can always be a bright side.

So, plan for the week ahead now and confine to trading activity. Investing can be done in pieces, when some good stock (that you have identified earlier) falls into some good support zone or has a meaningful reversal. We will remain in a trader’s market for a few months more. 

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 BloombergQuint or its editorial team.


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