Nifty: The Elusive Support

The IPL season seems to have had an impact on the Indian stock market as well. The Nifty has upped its scoring rate and consistency, scoring a century for almost four consecutive trading sessions. While the trend has been clearly down of late, lots of people have been looking around for the support which will arrest the fall and propel the index to new highs.

The Nifty did not give a damn to the 38.2%, 50% and 61.8% retracements as of now. The next hope is 78.6% which is close to the 8400-mark. Before getting into my observations on the Nifty, I wanted to talk about the propensity of analysts to identify the next support and making a call that Nifty is all set to move to new highs.

If Nifty indeed has bottomed out and headed to new highs, we have a lot of room to the upside. When the price is hurtling down, why bother to pick a bottom. OK, you may not buy the absolute low where the Nifty turned, but nobody does so consistently.

And, more importantly, you don’t have to, in order to make money in the market. Even the Elliott Wave Theory says that there is a Wave-2, offering better entry after the inflexion point.  Let the price stabilise and opportunities will come by. There is no harm in waiting for the index to complete first round of rally and we can buy the next retracement.

The idea behind this post is to look at the different time-frames and share my observations. The intention here is not to project or forecast, but to make some observations based on what the charts reveal.  Let’s start off with the monthly chart. This time frame makes me worried about the Nifty outlook. What is bothering me? Have a look at the chart first.

Look at the move from July 2014 till this month. The rally has been overlapping in nature and pay attention to the “buying-tails” in most candles. This indicates that the residual buying interest has been absorbed on the way up and if the price were to retrace, it is going to be swift and nasty on the way down. Am not saying that this “expected” quick-fall will happen immediately, but this zone is a potential landmine. Whenever price dips into it, expect a big red wide-ranged candle in the monthly time-frame.

If you also pay attention to the Bollinger Bands plotted in the above Nifty Monthly chart, it is clear that the “BandWidth” has reached an extreme and turned. This is a sign that a correction is underway and reversion to mean in the monthly time frame has probably started. There is a case for the price to test the middle band (20-month moving average).

For the bullish camp, a strong recovery in the remaining trading days of this month would provide a ray of hope. But, if the Nifty were to close below the candle open at 8,484, then there is a strong case for some more downside. How much downside? Let’s wait for this month to be over to discuss about that. Remind me, and I would post an update here.

Let’s flip to the weekly chart now.

IF you notice, there is a first sign of a swing low being broken in this time frame. What is even more worrying is that the index has made a “potential” lower high at 8,844.80.  If the break below the 8269, then it would confirm the sequence of lower highs and lower lows which is not something the bullish camp would cherish. I am not too dogmatic about the levels. A intra-week probe of 8,269 and a quick recovery thereafter would not qualify as a valid lower-high, lower-low pattern. So, apply some common sense and logic and do not go by the rule-book.

Let’s look at the Daily Chart now.

The price bounced from support at 8269 but the rally was halted right at prior resistance, marked by the blue line in the weekly chart. This is a sign that the sellers are stronger. If you want to appreciate why I am concerned with the monthly chart,  have a look at the recent rally and the subsequent fall. To my eyes, the recent rally in daily sort of resembles the monthly chart. Question is will there a similar huge bearish WRBs (wide ranged bar) in monthly? That “possibility” is making me worried. It may happen next month or some farther date in the future but whenever the price probes this zone in the monthly chart, expect the bearish camp to be overjoyed.

In the daily chart, I have drawn a modified Schiff pitchfork and price is now right at the middle line. Why did I choose the modified Schiff and not the regular one? I wanted to give the benefit of doubt to the bullish camp and wanted to come up with a slightly higher support zone 🙂

If we use a regular pitchfork, then the minimum support or target for the Nifty will be far lower. For now, let’s work with the modified schiff. The price has to clear the upper parallel to suggest that the downtrend is over. Until then, there is no point harboring a bullish thought of Nifty making new highs.

What I want to see is something that indicates that the bullish camp is in control. I would be willing to bet my money on the long side once I get that clue in the daily or at least a lower time frame (hourly) chart.

Before I wind up this ultra-long post, here is a quick look at the hourly chart.

If the price does not recover tomorrow, then there is a strong case for the price to drift all the way down to the lower parallel of the blue pitchfork. What will make me look for long trades, at least in the short-term time frame?

I would want the Nifty to clear the red line at 8,563 and I would then sit up and start looking for a retracement to buy the Nifty for a push to 8,630-8,650 range or even the upper parallel of the downsloping pitchfork. Let’s take one step at a time. If the Nifty clears 8,563 and forms a higher low on a subsequent retracement, then there would be a case for buying the Nifty. That would also be the first baby step in calling for a possible bottom being in place.

If the Nifty cracks further and heads south, please do not write to me saying that 8,563 is too far off to be considered as a meaningful reference level. Please realise that price leaves behind such reference level or clues on the way down and up. It is up to us to identify them.

Let me reiterate that the objective behind the post is not to give absolute prediction on where Nifty is headed. I am just sharing a few pointers that grabbed my attention. The idea is to avoid chasing price and eliminate guess work from trading. I do not have any any trading position in the Nifty but I own a portfolio of stocks which includes Nifty constituents.