Tech Boards and More – Shattered Feelings

This week was one for the record books. We saw the larger beach for a day after about two years. The last time the Nifty fell more than 5% (and Bank Nifty 6%) was back in March 2020. As the market had risen so much since then, everyone had almost forgotten what it’s like to suffer a drop of 5% in one day. Stocks are crashing and traders and investors are going numb. During the 2020 round, we were hit by the Covid-19 and it threatened to visit all the houses. Therefore, the decline continued for about another week before bottoming out. This time around, however, the source is far and somewhat independent – ​​except for what it will do on oil and gas prices – and so the very next day we had a move away.

There are always signals. But signals are actually defined by the context in which they occur.

No doubt, the bias was down. But looking at the intraday chart, we can see that it’s been a bit of a rollercoaster week. The gap took everyone’s breath away and a drop to nearly 16,000 also destroyed complacency. The first chart, as usual, shows the action for the week.

The breadth reading went to such an extreme on Thursday that there was a good chance that at least a temporary bottom was in place. On Friday, new buying actually took place as most traders were stripped of their positions and had room to create new ones.

Last week’s column was quite pointed in that we needed to be on the lookout for dips and we received signals about this early in the week. So ideally traders should have reduced or squared their long positions. It would have been difficult to get into shorts as the pace was slow, but Tuesday’s rally to close the gap offered the best chance to create shorts. The reward for Thursday’s shorts was far more than many expected.

With the rise of the VIX, sentiment was deep in the fear zone. The second chart shows the India VIX. We had looked at this one earlier and expected it to pull back, but instead we have a spike in values.

As the VIX weekly chart shows, the peak has reached a one-year high in value. Typically, winding down from here takes a while. We can therefore expect bullish action if the bearish momentum ceases.

The damage to sentiment weighed on the High Net Worth Individuals Group (HNI) futures long positions. The data shows that it is down more than 30% at expiry. Interestingly, however, Foreign Portfolio Investors (REITs) were building long SSF contracts. This is unusual and should be monitored. Overall open interest has certainly cooled off the highs reached in the December series.

There are many questions now in people’s minds. Above all, is the decline over? To answer this question, one must state that prices fell to a cluster support area near 16,240 and this also happened on a cycle reversal date. Therefore, we can consider the low to be reasonably good.

The Nifty 50 broke above the 200-day exponential moving average and that made a lot of people nervous. The small and mid cap indices also fell sharply and, as we explained in the previous columns, the long-term support trend lines of each of them also broke. Thus, the diagram suggests lower levels to reach. The fact that the move down was well accompanied by momentum adds to the possibility of continuation. Given that the market rallied nicely on Friday, there is ample downside room and therefore continued caution is warranted.

The next question would be whether we can rally well if we reach good support areas below. The answer to that would be negative. First, the feeling is damaged. Second, REIT selling doesn’t seem to be stopping, so supply is constant. Third, with the sharp decline, almost everyone is stuck with a deficit portfolio, so new money would be slower to come. Then there’s the fact that among Nifty voters we have banks and information technology in crisis, with automotive and consumer packaged goods also retreating. Reliance Industries has reached a plateau. These make up the bulk of the weighting on the index. If these are not going to actively pull, then the chances of a strong rally are tough. The rest of the stocks don’t really have the power to push the Nifty up much.

The other reason is based on something I wrote earlier this year. I said at the time that if the December low is broken, there is a good chance that the market will remain trending lower for the rest of the year. I would now expect this scenario to unfold.

This does not mean that the market will not have opportunities. The baton could be taken over by quality small- and mid-cap stocks. Thus, it will become a stock pickers market for the rest of the year. So themes and stories are what we may need to be on high alert for. New winners may emerge. The IPO of Life Insurance Corp. of India will suck up cash and buyers could become much more selective. Many stocks that have fallen an average of 30% from October in the recent fall may stop falling, but may not really recover as they did before. Thus, we may have to unearth new winners.

Two years in a row we all had a great time and all we had to do to make money was make sure we got on the train. Now we may have to work for our profits in the months to come. All good things come to an end. The Covid bull phase ended in October 2021. We were all hoping it would recover on its own. But the market seems to have a slightly different idea.

Finally, a question mark to end. There is evidence that can be seen in two ways.

It can be argued that if the corrections (three legs visible in it) cannot even produce a pullback to a 23.6% retracement, then the trend is too strong and further substantial advances may occur. This is the bullish view.

The other way to look at it would be that a two-year drive would require a lot more correction (more like a 38.2% or even a 50% retracement) and so this drop is only part of a bigger fix. This would be the bearish view. There are plenty of takers for this, especially those focused on valuations. After all, the Nifty is up 146% in 82 weeks and has only fallen 12.5% ​​from the high in 18 weeks.

For the bullish scenario to materialize, many things need to come together – fund flow, REITs reducing their sales, earnings growth, big government investments, global markets kicking back into action, and so on. For the latter scenario, even the absence of these positives would be enough to produce continued drift. So we know what to watch out for in the future. Let’s build the scenario as the data unfolds into the future.

In the immediate term, rallies may struggle to break above the 17,000-17,200 levels and, if observed, can be used to exit some unfavorable positions. Should the declines continue, the 15,900 area would be where one might attempt a buy for a rally.

CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise and NeoTrader; and Chief Investment Officer of Plus Delta Portfolios.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.

Comments are closed.