Most market participants (including yours truly) were surprised by the speed and the extent of the rally witnessed last week. Without getting into #AsToldBefore exercise, I wanted to discuss the Nifty from a prism of Wyckoff methodology. Have a look at the daily chart of the Nifty featured below.

After completing the “distribution” near the high of 9119 in March 2015, the Nifty got into a “Markdown” phase which reached its downside objective at 7,100-ish as detailed in the earlier post. The low formed on the Budget-day qualifies as a “Selling-Climax” in the Wyckoff parlance.

Nifty could now be tracing out, what can be labelled as Wyckoff’s “Automatic Rally” .  If the assessment is right, expect Nifty to remain range-bound for a while once the current rally ends. Recall the consolidation phase between October 2008 to March 2009. We can probably get into a similar phase before the next leg of the trending move happens.

If you want more recent example, have a look at the Tata Steel chart featured below. Hope you can use this chart and relate to what Nifty might do.

Notice how price was stuck in a trading range for a few months. Despite the negative-newsflow, price did not breach the lows of the range, indicating accumulation by biggies. Expect a similar phase in the Nifty, which is typically termed as “building a cause” for the next trending move.

If you are by any chance overwhelmed by the Wyckoff terminology referred to within double-quotes, then please feel free to run a search and there are tons of material explaining these terms and concepts.

While the discussion thus far might sound more academic or dull for most, let’s now get into more interesting question: Is the worst over and Where is Nifty headed !

My “guess” is that the worst is over but that still remains an informed-guess until there is concrete technical evidence to substantiate the claim. A breakout above the upper blue trend channel line in the bar chart at 7,850-ish would be an early affirmative answer to the question : Is the worst over? Notice how price briefly poked below the lower trend channel last week and managed to bounce back immediately. Classic Wyckoff stuff.

While the technical indicators in the daily time frame have triggered a buy signal, it would be prudent to see if this strength in the daily chart percolates to the higher time frame. We just have to wait and watch for further clues as time unfolds.

Before I wrap up this post, let’s look at the Point & Figure chart, courtesy www.Definedge.com.

A buy signal has been triggered in the chart, translating into a “vertical-count” target of 7,800. This target would gain more credibility once the price breaks above the down-trending red “Bearish Resistance Line” which is at 7,550-ish. A breakout above that line would be an early message that things are getting better for the Nifty. Once that happens, the blue “Bullish Support Line” drawn in the above chart would assume significance.

To sum up: There are signs of things settling down and turning around for the bullish camp. But, we need more evidence to strengthen the bullish-case scenario. Breakout above the down-sloping trendlines in the bar chart / Point and Figure chart would be the signs that I would be looking forward to.

As long as the recent low of 6,825 is not breached, expect a rally to atleast 7,800. The immediate support is at 7,250-7,350 zone. Signs of support in this region will be a healthy sign and I would be inclined to consider long positions thereafter.

I guess the target of 7,800 might impart a sense of disappointment among a section of the readers. Though it is not difficult to justify the case for much fancier target, let’s take one step at a time. Expect more frequent updates henceforth, as and when price clears some key resistance levels discussed in this post. If I fail to do an update, please feel free to send a reminder.

PS: One of my friends asked why there is no trademark Andrews Pitchfork chart in this post. Just to pacify him, I have included this chart as an addendum.

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.

It has been a while since I posted my update on the Nifty. The reason is that there was no need to do an update as Nifty was cruising to the earlier mentioned target of 7,350-7,500. Here is the link to the prior post. Now that the index has reached this target zone and there are early signs of stability at this zone, I wanted to share a few observations. Have a look at the Point and Figure chart of the Nifty.

In the earlier post, I used fibonacci clusters to project target zones. In the above Point & Figure chart, I have used the “Horizontal Count” based on Wyckoff methodology to arrive at the likely downside targets. As mentioned in the above Nifty chart, the price has halted, at least as of now, at the 7,100-7,375 zone.

The price has displayed early sign of strength after hitting the Point & Figure target zone, which is a positive sign. The positive divergence between the RSI and price action in the weekly chart is another factor that the bullish campers would have taken note of. Now, the key question is: “Is this good enough to conclude that the worst is over and a low is in place for the Nifty?” Definitely not !

While there is a strong case for leaning towards the bullish camp, we need to wait for more clues before concluding that the worst is over. I wish to share a few observations that would strengthen the bullish case scenario. I would retain the bullish bias as long the the recent low of 7,241 is not violated and, more importantly, would like a see the high of this week at 7,600.45 to be taken out soon.

A breakout above 7,600.45 would not only initiate a sequence of higher highs and higher lows, it would also push the price back into the prior trading range of 7,539 – 8,336 zone. Recall that price got rejected near the low end of this range last week. Hence, it becomes all the more critical for the index to clear this high of 7,600.45 level.

In the above Nifty daily bar chart, it is apparent there are two sets of trend channels that are relevant. The immediate resistance for the Nifty is at the upper blue line at 7,680-ish, followed by the upper green line at 7,920-ish.

To conclude, while I have a bullish bias, I prefer to wait and watch what Nifty does at the crucial resistance zones. A breakout past 7,600.45 and more importantly, 7,680-ish would would bring more cheer and confidence to the bullish camp. I am already long in a few index heavyweights and would increase my allocation when Nifty clears a few resistance levels discussed in the post.

Let’s discuss potential upside targets IF Nifty clears the resistance level. Until then, the bullish view would be more of a wishful thinking.

Rather than doing a routine “Nifty-Outlook” post, I felt doing a round-up of sectoral indices, and how they have performed in relation to the Nifty, would be far more interesting. Let’s start off with a Relative Rotation Graph (RRG) developed by Julius de Kempenaer of www.relativerotationgraphs.com. Direct your attention to the weekly chart below.

The above chart captures the weekly relative performance of the sectoral indices in relation to the Nifty over a period of one year. The ones in the top-right Green quadrant indicate relative -outperformers while those in the bottom-left Red quadrant are underperformers. CNX Pharma, CNXIT and CNX FMCG have been top outperformers whereas CNX Metals has been a rank underperformer.

When the defensive sectors such as Pharma and IT (some may argue IT not being defensive) are still outperforming the Nifty, it makes little sense to talk about a big time bull market as yet.  The high-beta CNX BankNifty  has drifted into the Red Weakening quadrant which is not a healthy sign.

For the resumption of the bullish trend, we would ideally want the BankNifty and the CNX Auto index to get to the top-right green quadrant soon. At the moment, both these indices (which are typically a proxy for economic growth) are in the Red lagging quadrant.

Having talked about the indices and their relative performance, please be reminded that there is a lag between the actual index movement and their progress in the RRG graph. The indices switch quadrants only after price has made a significant move. So, let’s switch to the more recent performance of these indices since September 7 low.

It is apparent from the above chart that CNX Realty index is the top out-performer since September 7, followed by the Bank Nifty and the CNX PSUBANK index. Did the pro-money get a wind of the recent rate-cut?  The defensive sectors such as CNX IT Pharma, CNX IT have either been relative under-performers or muted in their returns, suggesting that market participants are PROBABLY sensing a turn around in the economic fundamentals. It is however too early to make any conclusion based on one-month price action but, it would not be outlandish to state that we might probably bottom-out soon.

Share your thoughts on the post and let me know if a regular update on sectoral indices would interest you. Post your feedback in the comments section below. Keep watching this space for regular updates.

PS: RRG charts are quite insightful in terms of sectoral allocation too. It is not only logical to focus on the Green Right Quadrant sectors, but is also equally important to avoid the ones in the bottom Red Left quadrant.