Nifty: Is the Worst Over?

After the carnage last week, I presume the above question is at the top of most market participants. Even at the cost of disappointing a few, let me confess that I don’t have the answer as yet. In my post last week, I mentioned that there are no compelling reasons to expect a bottom in place for the Nifty. Is this any different after a week?

After the crash last week, I don’t have to tell you that the index has reached extreme oversold levels. There are a few interesting observations which I wanted to share now. These observations suggest that the Nifty is unlikely to fall sharply, at least in the near term. Before we proceed any further, have a look at the charts posted in my earlier post written way back in April 2015 where I voiced my concerns on the Nifty.

In that post, I had shared a monthly chart with Bollinger Bands. Here is the updated version of that chart.

I had highlighted in that earlier chart that price was the upper Bollinger Band and was stretched in relation to its mean. As in prior occasions, price did retrace all the way down to the lower Bollinger Band. While the Price has edged below the lower  band, remember that the currently month is still not complete and there is room for price to recover and close inside the band. And, the RSI, plotted in the lower pane too shows relatively oversold reading.

The fall last Thursday is “suggestive” of climactic action and as observed in last week’s post, price has also met its downside price objective of 7,100 based off Point & Figure chart.

Given this backdrop, I do not see any significant slide in the Nifty from a short-term perspective. Given the oversold conditions across all time frames, there is a case for the Nifty to either consolidate in a trading range or see a sharp counter-trend rally, fueled by short-covering and hopefully some value-buyers stepping in.

What price does in the next few weeks would provide the answer to the key question “Is a low in place for the Nifty”. I would rather await further clues instead of second-guessing.

Before wrapping up this post, let me share a couple of charts which might provide some comfort to the beleaguered bullish camp. First up is the updated monthly chart of the Nifty which I used in my post written way back in April 2014, titled Nifty: Destination 11,000.

Notice that the price is back to the centreline and IF price does not breach this line, then the case for 11k Nifty is still valid. This chart is just another example of price breaking above resistance and then coming back to retest it. Question is will the retest hold? I hope so !!

And here is the breadth indicator based off Point & Figure charts. This chart shows the percentage of stocks where the price is in the column of Xs. What this means is that if reading is low, it indicates most stocks are in the column of Os, and hence extremely oversold. The scope for a further fall is thus limited. Similarly, a high reading would indicate majority of the stocks are in the column of Xs and hence indicates overbought condition.

Here is the Bullish X Percent chart, courtesy Trade Point Software from www.Definedge.com

It is apparent from the above that the breadth indicator has reached oversold extreme, justifying the case for a short-term relief. As observed last week, let’s talk about near term targets for the Nifty after we see some concrete move to the upside.

Note: I hold shares forming part of the Nifty and would add more based on the price action.