Nifty In Technical Charts: Shaken Sentiment

For the coming weeks, CK Narayan suggests a less active play in the markets with momentum investing also given a bit of rest.

<div class="paragraphs"><p>(Source: Marga Santoso/Unsplash)</p></div>
(Source: Marga Santoso/Unsplash)

On Tuesday of the week, the market was subject to a bit of a jolt. Just as people were about to rejoice the crossing of the coveted 20,000 mark in the Nifty, the prices took a knock, which at that point of time seemed quite nasty. Especially as the mid-cap stocks took a sharp knock and scores of stocks were down 5-10% on an average. It looked as though good times were over and many a commentator jumped in, saying 'I told you so!' 

Now, here is the intraday chart of the Nifty over the last week or more. Marked right in the middle of the chart (ellipse) is the trading of Tuesday.

Nifty In Technical Charts: Shaken Sentiment

For anyone who was not a part of that day’s intraday action, would it really seem like there was some hungama on that day? On this chart, I have added a simple linear regression channel. There isn’t even a dent in that channel. Does it really look like many in the market were thinking that it is all over? On subsequent days, it is evident that the Nifty managed to recover and head out higher to finish the week rather well.

But, it is all a matter of where you are playing. See chart 2. This is the same intraday weekly chart but for the mid and small-cap stocks. Here, you can see a world of difference. The arrow marks the action of Tuesday.

Nifty In Technical Charts: Shaken Sentiment

Now, this is a very, very different chart and those who lived through this have had a very different experience of the same market. Hence, the version you get will largely be dependent on which section of the market you play. If you have been largely a player in the mid and small-cap area of the market, then it has been a poor week and the recovery till the end is pretty measly.

I feature both these intraday charts just to illustrate that for a correct market view, one at times needs to look beyond just the Nifty or the Bank Nifty. The market is a bundle of sentiments and that is made of all aspects of the market, not just the leaders. The sentiment generated by the indices is still bullish but that generated in the small and mid-cap area is tinged with bearishness now. Thus, at the end of the week we have a mixed sentiment, I believe.

So, should we go with the Nifty or go with the broader market? For some broadening of perspective, I would want to recall a chart shown in earlier week's letters. See chart 3 showing the median line of the pitchfork and how the Nifty could head towards it. The Nifty has hit this line during the week.

Nifty In Technical Charts: Shaken Sentiment

Ideally, median lines of pitchfork act as a good resistance. Even earlier, the prices hit it and soon bounced off it lower. Now, with sentiment somewhat mixed and perhaps a bit shaken, can the median line prove to be a wall that the Nifty may find difficult to cross? I would certainly look for it.

One of the reasons I would want to be a bit wary is because of the time count. My cycle studies indicate that October will not be a bullish month. I had already warned that beyond the first week to ten days in September, the trends may start to falter. Volatility has set in. I expect this to continue into October as well. The only sustained time signatures I get for the days ahead is in the last week of September, when the market trends may wear a better bullish look. But this is a short window, replaced soon by uncertain days.

Typically, at such times, we will find that the markets will take on a rangebound action and present dullness on many days. Also, it may take on a very stock-specific nature to the moves. Stock and sector rotations may become rapid and moves may not really sustain for long enough for us to entertain swing or positional trades. Thus, a time for quick trading is upon us where one will have to be quick and adroit in entering as well as exiting from trades. Not really for everyone. It is at times like these that access to software such as Neotrader can prove to be invaluable as they can guide people through fast shifting market trends. People don’t find so much difficulties when the trend shifts slowly but find markets greatly disconcerting when the shifts occur rapidly and without much notice. Such a time, I feel, is upon us for the next 45 days.

This is, of course, not to mean that the market will be devoid of opportunities. There will always be something in play and news flow is bound to be there in some fashion or the other. For example, the September-ending results season should start from mid-October and will provide some news inputs. But, if the overall trend is not favouring sustained trends, understand that even good news may produce only short-lived moves. It will therefore require more than ordinary good news to create sustainable trends.

I am stating this also in the context that there are a lot of ‘stories’ that are doing the rounds now. Some of the earlier ones (like Suzlon and Reliance Power and a few others) have come good during the recent boom time, so the tendency would be to believe that it will repeat yet again ahead. An example of this would be a stock like Idea, where repeated stories of fund infusion have been hitting the markets. Will it work? I don’t know. But given the stage of the market, I would now tend to believe such stories less and see whether price action really bears out the rumour. Only then will we be inclined to lend some money to such stocks. The days of playing pure momentum may be at a rest for now.

In the earlier letters, I had indicated a target zone around 20,250 for the Nifty futures and that is now reached. Current cycle has a high around 20,350 that may be difficult to top. Option trading volumes have shot up even further, with open interest at near the money options being at all-time highs. PCR (put call ratio), however, remains largely neutral, implying a huge trading nature to the position build rather than much directional play. These are subject to quick liquidations and hence, players in options also need to be slightly wary.

For the coming set of weeks, I would suggest a less active play in the markets with momentum investing also given a bit of rest.

CK Narayan is an expert in technical analysis, the founder of Growth Avenues, Chartadvise, and NeoTrader, and the 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.