Nifty Weekly Forecast: Very Soon Hitting Resistance Zones

There shall be no disagreement about how the market performed last week. It has been a long time since we saw a whole week of advances. Look at the layout on the intraday chart of the move in the first chart. A straight rise with big gaps in favour of bulls. Those helping hands were from overseas events of course. But who is complaining? Not me, for sure!

Asking the question of whether we made a durable bottom on June 17, I answered in the affirmative in my June 25 column. The index back then was 15,211. In the same article, I also suggested that the auto sector was revving up (CNX Auto 11,200) as well as the MidSmallcap 400 Index too (at 5,750). A long with a stop at 15,500 was suggested in the follow-up article as well. The July 2 column also called for continued weakness in the Rupee with a possible target of 80 levels. So, as far as readying the readers for gains ahead go, they were given a heads-up well in advance.

Targets Achieved

In the July 9 article, I provided the target zone of 16,500-16,900 and also listed a few technical events that needed to happen for those targets to be achieved. Fortunately, the market has managed to tick the boxes on all those requirements and we arrived at the first of the target zones on Thursday. Buoyed by some expiry-related forces, the prices of the Nifty overshot to reach a bit higher.

In the July 16 column, making a correlation study with the rupee, I remarked that more recently, the Nifty trends have veered off the inverse correlation and quite in keeping with that, the market continued to rally even as the rupee sought weaker levels. Answering a question on a continuation of the trend, I said, “so long as we don’t give up support levels, we should.” The index held firm in its trend, chalking up further gains. In the same article, I also called for the possibility of an oversold rally emerging in the IT sector (26,412).

All of the expectations came through rather nicely! The Nifty has now moved to target zones and that is a nice 1,400-point move in a month. The auto sector moved around 9% or about 1,200 points to 12,580, the IT sector moved about 7% or around 2,400 points to 28,342 and the MidSmallcap 400 too moved about 9% to 6,280. It does appear that July has lived up to the historical evidence of coming through for the bulls, especially when the prior three months were negative. Add one more instance to that statistic. As the cliché goes, ‘To the prepared, go the spoils’.

That brings us to the most important question, what next? For an answer, we look to the weekly chart first. Prices are in the cloud and at the site of the Kijun-sen line. Overhead we have resistance projection trend lines using a special slope trendline and channel. It continues to remain in the region given earlier (16,700-16,900). Time counts suggest that we are now into time windows for rally completion. The entire down move since the October 21 top can now be captured in a nice channel for both the Nifty and Bank Nifty.

So, chances are pretty high that the ongoing rally should now terminate. The future cloud remains bearish and there is no scope for any immediate change.

The picture on the daily chart of the Nifty is not dissimilar but the shorter time frame indicators are placed better. In the third chart, we can note that the TS-KS lines are positive but both are still below the cloud, so the uptrend is still a bit of a drag. Prices, like in the weekly, are engaging the top cloud line. During the week, the kumo twist signal occurred. The CS line is about to engage with the cloud too. What do all these mean collectively?

We are trading into resistance so some caution is advised. Maybe it is good to take some money off the table. I have. Tighten the stop on the balance holdings. But what if the rise continues? Then some interesting things will happen on this chart. First, the prices will break out of the cloud. The Kumo twist has signalled that near future dips need to be bought.

If prices go above 169,00 then the CS line too will get dragged above the cloud and that can produce some acceleration because there is nothing to obstruct its further pathway. The TS-KS lines will soon follow.

Now, these are all good news for the bulls. But they are caveated on the Nifty showing some fresh legs at this juncture.

The pessimism is high across the world and in our markets too. Not too many have participated in this rally and the few large gaps didn’t really help matters too. FIIs have covered shorts and have turned buyers during the week. That ought to repair some very bruised sentiments. Other data relating to Retail positions also indicate high pessimism in terms of position build. The trader set would have happily taken positions off in this rally. So difficult to resist profits, after all. So, those are all conditions that can force the pace if the right environment gets created.

Now, what can that be? Continued buying by FIIs, for starters. DIIs may not pitch in much, probably, but retail can. There is enough money on the sidelines to come in. Short covering will continue and do its bit. Earnings season so far has been a mixed bag. But a few good ones may do the trick. Over this weekend, about 35% of the Nifty market cap is to declare results (Reliance Industries, ICICI Bank Bk, Kotak Bank, Infosys and others). If they spring a positive surprise, then another gap is due and the Nifty can easily add another 500 points to its tally.

Any spoilers to this scenario? The last one first. If results are not up to the mark then it will be difficult to push the pedal on the gas. Then the trends may stall, especially if Friday data reveals more short covering has occurred. Next, the week will see the monthly expiry and that is dovetailing straight into the U.S. Federal Reserve meeting of July 26-27. Some 50-basis point move is expected already as a rate hike in the US. If any worse or the commentary is not palatable, then we could see some nervousness return. The Eurozone has hiked rates by 50 bps. If that translates into any slowing of buying by European funds then it will add to the woes of emerging markets. Global events may therefore take centre stage once again in the coming week and act as party poopers.

How will we know which scenario to follow? Easy- the prices will tell you. If the market is going to take more cognisance of global events later in the week, they will respond less enthusiastically to any good news or may give up gains swiftly. If market doesn’t get the booster dose of good results over the weekend, then the trends may wilt early in the week and will get driven further by bearish expectations of the upcoming global events. So, trading on Monday may probably set the pace for what may occur over the end of the month.

What is a prudent strategy? If you have not already booked profits, then I would suggest doing so early next week- even if the market goes up. Or tighten your stops. 16,400-16,500 should be the zone for stops for trading longs. What about investing? As mentioned in earlier articles, my view is that any good results thrown up in Q1 can be looked at. Let the Fed event pass by and then look for some new names.

If the market falls, will it be swift and damaging? Unlikely, is the answer.

Please understand that reaching resistance does not automatically mean a reversal of the trend. The Kumo twist signal on the daily chart would imply that the next dip can also be bought into. So I would expect the prices to take support beneath, wherever it can be found. If the rise halts, I am expecting the market to stage a consolidation rather than a fall.

So, we have covered most of the possibilities for the week ahead and can therefore have a plan to deal with all of them. That’s the best we can do, after all.

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Neal Bhai has been involved in the Bullion and Metals markets since 1998 – he has experience in many areas of the market from researching to trading and has worked in Delhi, India. Mobile No. - 9899900589 and 9582247600

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