At An Inflection Point, Once Again

The last week was a bit of a write-off for the bulls. In a slightly truncated week, the prices declined for all four sessions and the Nifty 50 ended down, threatening the swing low made back at the end of October. Since a lower top has formed already in the most recent rally, the break of the last swing low would be a slightly bearish signal of a lower top and lower bottom. Not that we had not seen this earlier… we did, back in April 2021. At that time, everyone was ready to call it quits too. But the index held on; formed another medium-term higher bottom; and continued higher. People are hoping that we see something like that occur once again. Can it? One must admit that the intra-week movement certainly doesn’t look encouraging.

Writing a few weeks ago I had mentioned that the last time when we saw some more sustained time-wise corrective activity was back in the February-April 2021 window where markets had spent time but not seen price damage. This time, too, it is not too dissimilar. The high was recorded a month ago, on Oct. 19 and since then we have also seen a dip and rally to form a lower top and now another dip. So, now if prices go below the Oct. 25 low of 17,569, then we will get a lower top-lower bottom and all those that are bearish can immediately jump up and say, ‘Run for it. Now!’ Lots of people have been waiting for that anyway. But like I said earlier, we have seen this back in April this year and nothing came off it. That was mainly because there was a pattern but there was no price damage.

No doubt, the rules of technical analysis do say that pattern is supreme. Changes occur in the smaller time frames and burgeon into bigger ones later. So, if the pattern occurs, then it is a warning. But along with a pattern, associated signals have to be triggered as well. When calling for a larger correction, one of the primary elements to look for would be price damage, because that is what would tell us that long holders are determined to sell out, even at lower levels. So, when price damage is absent, we can perhaps even question the pattern or label it as being shorter-term in nature, i.e. below the time frame on the chart where it is visible. Here, in this case, the pattern may occur on the daily charts. Without the price damage, we would have to label it as minor despite the fact that it took several days. See the correction of the last time: it corrected the advance from March 2020 to February 2021. This correction took 42 trading days. Compared to that, the current reaction is 21 days old.

The trendline is also being approached. A fall below 17,500 would rupture this trendline. That would be a second point where everyone would howl ‘gone’. But note in the chart, too, that the trendline had been broken back in April 2021 too—see the dashed trendline. The rise was a year old back then and, hence, the expectation of a dip was high. However, the market managed to right itself and within the next 25 days, pushed to a new…