Indices At Inflection Point

JC Parets
March 25, 2021

Markets across the globe have been taking a breather as the momentum cools off. Taking a closer look back home, the indices have been largely choppy and have consolidated over the past two months.

Is this merely a consolidation? Or are we looking at a minor correction ahead? Let's take a look at what the charts have to say.

In our Three Charts for the Week post, we talked about the resistance Nifty had been facing at 15,400 and also highlighted the crucial support at 14,460. We noticed a divergence in Nifty in January and that has continued to play out as the rally progressed. Within the current setup, the price hasn't been able to move past the 15,400 mark, in addition to now challenging the support level of 14,460.

A breach of 14,460 will lead to a lower high lower low formation on the daily chart, indicating an interim correction in the ongoing bull rally. The next level to track would then be 13,650, which is the next swing low. Up until now, the market has been largely messy and has only moved sideways. A breach of the support at 14,460 however, could trigger a short-term correction meaning that we would have to be fastidious in our stock selection.

Click on chart to enlarge view.

Let's also take a look at the Mid- & Small-Cap indices.

Nifty Mid-Cap has been outperforming the market and had continued to display resilience even as Nifty 50 started cooling-off. This resilience however has now come into question with the move over the past week. With an overhead resistance at 24,750, the Mid-Cap 100 index has been holding above its support zone of 22,100-22,550. A breach of this support could change the short-term trend going forward.

In the event that the support zone is breached, the next support to watch out for would be 20,850.

Nifty Small-Cap 100 had recently breached an important resistance at 7,850. With the current move and correction, the very same level comes into question again. A move below this level could take the index lower towards the next support level of 7,500. The indicators have stayed away from bearish territory so far, but that is also something we're keeping an eye on.

One of our favourite risk-on indicators to track is the ratio chart of Nifty Small-Cap 100 to Nifty 50.

So what does it say? Well, there is a small consolidation right at the resistance which is reflecting the present scenario. A move lower could temporarily put a halt on the outperformance of small-cap over large-cap and subsequently make a case of being slightly cautious until the trend continues moving higher. But what we do care about, is the direction of trend in this ratio, so gotta keep a close eye on this one!

Every market comprises rallies and corrections, regardless of whether its a bull market or a bear market. But depending on the kind of market we're in, the duration of those rallies and corrections become important to track. Minor corrections are normal in a bull market, but it is also important to track crucial levels to form an opinion of an ongoing trend.

The larger trend continues to be bullish, there has been no indication of a change in that stance. The short-term trend however is sorting out its mess at current levels and that is something we're watching closely.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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