At the end of last week, we summed up the analysis with the reading that more declines were likely. The market did not trouble us with uncertainty on that front at all. The minimum one was looking at was a retreat to test the March-May lows near 15,750 on the Nifty 50 – which was a few hundred points lower at that time. The market achieved those levels with a powerful gap-down on Monday that knocked the stuffing out of bulls. When the next couple of days showed no recovery, one could gauge that the decision had been made to go lower. But did traders’ spirits allow it? Hell no. Everyone pointed to how the market was still able to ‘hold’ the support at 15,650-15,700 area and there were enough calls for a recovery.
Then came Thursday and all those bullish views were decimated. In a relentless bout of decline, the Nifty sliced through every intraday support laid in front of it. Since this fall was preceded by a gap-up open, some people were caught on the wrong side, with bull positions created and shorts covered. Hence the strong decline came as a surprise. That the selling was by larger hands was shown by the kind of aggression during the day, where not even a single 30-minute candle rallied enough to break the previous 30-minute candle high. The first chart shows the woeful state of affairs of the bulls over this week.
Friday was a dull affair as the Nifty just meandered through some sideways action as players were too badly injured to attempt anything afresh. Even some news flow that the war in Ukraine may reach some point where talks could be explored did not enthuse anyone to take up positions. Sentiment remained too punctured for trends. For those that were forewarned through last weekend’s column about the possibility of continued weakness, the week should not have been too damaging.
One point made last week was, “however, fresh shorts can be considered quickly in case of continued weakness. That is how I would play it.” The signal came in with some vengeance on Monday itself, and gave traders opportunities to play it on subsequent day, even on Thursday morning. Those with the right mindsets may have been able to take advantage.
So, did we hit some supports with the drop over this week week? Unfortunately, doesn’t really look like it. On the contrary, matters are getting a bit worse on the higher time frame charts.
In the second chart, we can see the weekly with some indicators.
First, let’s look at the Ichimoku set up. After having crossed the cloud up way back in August 2020, the prices came down to break it (and that too a thick one) during the week ended. This is bearish. The fall was also instrumental in the future cloud twisting to bearish alignment (i.e. bearish Kumo twist). Both of these are not good developments for the trend. Further declines, if any, shall result in the short term trackers (the Tenkan-Sen and Kijun Sen lines) getting pulled beneath the cloud as well. In particular, Kumo twists, if not rectified quickly, will create more trended action to the downside.
Next, we see that the oscillators are in sync with the down move in the prices. The Directional Index lines are negative and the -DI line has actually taken up dominance. The ADX line is lightly inched up too. The RSI has pierced the 40 mark as well. These two also indicate a bearish state of affairs.
In earlier posts, I have written about how only the minimal Fibonacci retracement has been achieved so far. The next one is poised at the 14,350 area for a 38% pullback. A trendline connecting previous swing lows would cruise around 14,750 levels ahead and provide some support. Some Gann calculations point to 14,450 as the area where bottoms will square the tops of October 2021.
So, it seems like the genie that has been set off after the good support at 15,650 broke may hang around till the index reaches those lower levels.
The daily chart indicator levels are also at oversold zones and hence may prompt a rally. But the sharp fall of Thursday has pushed prices much below trend lines even on intraday charts. This makes it tough for bulls to regain the ground. The next chart illustrates this.
So, with a continued possibility of more declines, we need to persist with a bearish approach in trading. Prices having been shunted lower, it may be prudent to wait for some rallies towards the trend lines on the intraday charts to be approached before shorting. This way, one can control risks to some extent, although it does create problems if prices continue to fall without rallying.
We should continue to stay away from investing, for now, even if some items look attractive. During any fall, if people find stocks very attractive (as many seem to be doing just now), it is in, Elliot wave terms, still a corrective wave A structure. My longer term view (expressed in earlier columns) is anyway for a large correction to continue to unfold in both price and time.
Hence, there would be plenty of time and opportunities to get stocks at more favorable prices.
Long ago, there was a song by Led Zepplin (one of my favorite rock bands) titled the Song Remains the Same. The lyrics were a bit wonky on that one (like many rock music songs are) but essentially it spoke of things being pretty much the same whether you were in the California sun or the Calcutta rain or the Honolulu beach. The current market situation is something akin to that, weeks are passing by but the trends remain pretty much the same!
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 BQ Prime or its editorial team.
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