A Time Correction in the Nifty

Sat, 6 Mar Momentum Moves

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   Pre-Open   

   SGX Nifty   

   09:30 am   

   12:30 pm   

   Closing   

The Week Gone By

The week belonged to the bulls after bears ended the party in February. March started with gains for the bulls but historically, March has been a bears' month.

In the last 25 years of March performance, Nifty has ended 14 times in the red and 11 times in the blue with an average return of 0.10%.

Nifty reclaimed 15,000 levels but last week was did not belong to the large caps. Midcaps and smallcaps outperformed by huge margins against Nifty and they continued to hit new all-time highs.

I hope you remember our last week's edition of Momentum Moves where we said smallcaps will outperform the Nifty.

On similar lines of analysis, we believe it's time for bears to keep an eye on Bank Nifty.

Why?

In this week edition, we will be sharing views on both the Nifty and the Bank Nifty.

The Week Ahead

Nifty hovers in a rising channel

Nifty opened the week with gap-up at 14,638 marking the bulls strong. This move took the index to 15,273.

The bears aren't so weak though. They fought hard to take it below 15,000 with a consecutive Friday signaling profit booking.

We believe the time correction might happen in the Nifty as long as we are hovering in the range of 14,450-15,300. Any meaningful trend would emerge only if either side of this range is broken.

The stock specific action would continue. We hold our view that the smallcap index has potential to outperform the Nifty.

Nifty Daily Chart

 

This is the daily chart of the Nifty which is trading in a rising channel (marked in parallel green lines).

The index in the last week of February took support at the lower line of the rising channel and reversed reclaiming 15,000 levels.

Bulls reacted strongly at the key support of 50 EMA (Exponential Moving Average) on the daily chart and ended the bearish momentum in style.

The shakeout at the higher high above 15,176 is a trap for bulls as traders believe the fresh trend has emerged and went long.

Well they were taken out in couple days hitting their stop losses as the index fell back below 15,000.

We believe some time correction could happen in the Nifty as hinted by the RSI (Relative Strength Index).

The RSI is forming lower high indicating the negative divergence at high of 15,431. In the recent rally to 15,273, RSI has turned back from 60 levels and hovering in the range of 40-60. This is a sign of the lack of strength in the momentum.

The index trading in the range of 14,450-15,300 and RSI hovering in the range of 40-60 is sign of lack luster momentum.

As I said, the stock specific action will continue in mid and smallcaps in the coming week and traders should have those stocks on their watch list.

Bears Have an Opportunity in Bank Nifty

In the previous edition, we analysed the ratio chart of the smallcap index over Nifty to judge relative outperformance and underperformance.

On similar lines, let's look at the Bank Nifty to Nifty ratio chart today. We found something interesting for traders.

Bank Nifty to Nifty Ratio Chart

 

The ratio of Bank Nifty over Nifty indicates a short-term top is in place as we are witnessing a rising wedge breakdown at 2.38.

The rising wedge forms at the top and is known as an ending diagonal as it marks an end to the bullish trend.

An outperformance of Bank Nifty over Nifty from January end to mid-February has now ended and the underperformance of Bank Nifty has begun as it breaks down from the wedge.

We are expecting the ratio to dip and retest the breakout level of 2.25 (dotted green channel).

The rising trendline (marked red) has support around those levels. So it's just from a short term point of view, we believe Bank Nifty will underperform.

That's the view on the ratio chart but you might be waiting for our view on the Bank Nifty itself, right?

Here we analyse Bank Nifty daily chart to look for the short term trend.

Nifty Bank Chart

 

The long-term trend is still bullish in Bank Nifty as long as it is trading above the two blue lines which were resistance once and support now.

Bulls seem tiring at higher levels as we are witnessing sell-on-rise momentum in the last couple of weeks.

The black support line placed at 34,800 will be the breakdown level for bears. Options traders should remember that the expiry will be on Wednesday next week as Thursday is a national holiday on account of Mahashivratri.

Moving Average Convergence Divergence (MACD) in the above chart is indicating the bearish structure as the averages are sloping southwards.

The move below 34,800 will open the door for the levels of 33,600-33,800.

Conclusion

Nifty is trading in a rising channel pattern and is hovering in the range of 14,450-15,300. We believe the time correction can be expected till the index trades in this zone.

Bank Nifty to Nifty ratio chart indicates an underperformance of Bank Nifty as we are witnessing the breakdown of the rising wedge.

Bears may accelerate on the break of 34,800, towards the level of 33,600-33,800 in the truncated week ahead.

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