Nifty Weekly Technical Forecast [06-06-2022]

Nifty Weekly Technical Forecast: In the previous column, we studied the range that had formed and how a breakout may occur from that to set the immediate trend. We discussed that a down-move may continue upon the down-breakout but that an upside break may still meet with supplies at higher levels. Thus the bias was still bearish.

In the week just ended, the market did not tax our judgment too much as prices opened up with a gap, resolving the confusion of whether it can break up or down. With that issue settled, it then became a case of exercising a choice – follow the breakout with longs (for a swift rally) or wait for the rally to end and then short (for resumption of the main trend)?

These choices are not too difficult to make if the trader had identified properly what type of plays he or she would like to take. But therein lies the rub, isn’t it? Most people simply identify themselves with their trades from the point of profit and seldom the timeframe. Swift traders, active screen watchers, etc. could certainly have played long on the breakout as there were sufficient targets indicated higher. But for those playing the bigger trend, it should have been a time for sitting idle, waiting for the rally to complete, or run its course. Easier done when you know that you are playing the bigger trend. Else, not.

The direction hung in the balance for the four days leading into Friday when prices finally decided to side, once again, with the bulls. Even then, it wasn’t any walk in the park, affirming the assessment last week, that there shall continue to be supply. Through the week, such supply continued to keep the lid on trends. The first chart shows it looked for the week. Note that it was, in no way, an exciting week of breakouts and runs. In fact, the ending on Friday was a steep disappointment to the way the day began.

Nevertheless, the week was a positive one, as it finished above the open, and that too with a gap. Hence, one can perhaps expect some gains to continue if there are no adverse developments over the weekend.

Though there was a breakout higher, we did not really get any follow-through price action because the news flow was not particularly positive, especially overseas. FIIs were continued sellers in our markets, but that news is now a bit old. The latest talk is all about inflation. Everyone around, particularly in the United States, seems to have suddenly become an expert on inflation.

No doubt, the charge of inflation readings in the U.S. has been alarming. India, too, has seen a notable rise in inflation, but it is nowhere near as in the U.S. The noise coming from the din caused by inflation spikes in America appears to be creating some nervous waves among Indian economists and market experts. Here is a relative chart of inflation in the U.S. and India over the last few years to contrast the change in inflation in both countries.

Inflation in India has been a lot more sedate as compared to the U.S., and hence we should guard ourselves against the rhetoric pouring in.

To be sure, the inflation picture is somewhat worrisome for India as well, and perhaps is giving rise to expectations that there may be some more rate hikes ahead. However, any improvement in the situation may well quickly bring Indian inflation under control. The RBI seems quite determined on that front so far.

As we are looking at U.S. data, let us turn to another correlation that seems to have helped the rally attempt in India.

Typically, Indian banks support a Nifty rally. This time, the recent bottoming of the Nasdaq Composite has been mirrored by a bounce in the stocks of Indian IT majors that are well-represented on the index.

The third shows the Nasdaq (candle chart) hitting a combination of support projections, along with the Nifty IT (line chart) index which has been quite correlated with the former. The reversal in the Nasdaq seems pretty solid and hence likely to sustain. This ought to keep the Indian IT stocks also ticking, helping the Nifty further.

Other impressive gainers for the week were real estate and smallcap stocks. The latter is certainly a bit of a surprise, considering that the sentiment swing was nowhere close to being encouraging enough for people to invest afresh. Nevertheless, it is a heartening signal that participants may be returning to the market with some fresh funds, and that too can sustain the rally some more. Metals, which had got dented severely earlier, staged a bit of a rally as well. But by the end of the week, they still look jaded. This may remain a sector that is poised for more declines if the market rally were to fizzle out.

Thus, we have a bit of a mixed bag at the end of the week. The rally is on, but not truly on… certainly not in the way we would like it to be. There are some encouraging signs of sector leadership, return of retail, and possibly some risk-on coming back and no new lows (which is important for sustaining sentiments). But lack of strong gains is a bit of a dampener and still holds out only for minimal target achievements – around 17,000 as discussed in the last letter, being the range breakout target. We do need to keep our options open in the coming week, checking sentiment contributors (especially from overseas) along with the market’s response to triggers. Not going to be the easiest of weeks, I reckon.

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