A two-day sell-off undid the work done by the bulls during the week, bringing prices down to where they were last week. So, two small body candles for the weekly charts, and everyone is ready to call for a reaction.
But they have been doing that for quite a while, right? Sometime or another, they have to be right. And, possibly, this time maybe it will. Why? Because we have reached the price and time window that I had laid down long ago. Recall that we had 18,500–18,800 as the price zone and June 13 as the time goal. We have so far done 18,842 on futures, and the turn date is coming up early next week.
Chart 1 shows what has been guided over the last year or so.
The idea of forecasts is to be ready for market moves. It is also to plan the trades so as to take maximum advantage of what we expect to flow. It is expected that readers of this column would have been able to take maximum advantage of both price and time targets. The run-up from March 23 has been one of the smoothest of uptrends, and if one had been essentially long all through the past three months, then a lot of money could have been made. This was also one of the best times to have been a short-option player—those who shorted Bank Nifty puts made a killing over the last few months.
But, it is now time to take that money off the table. I am already out of the majority of my positions and have also booked out on many of my recent investments. If readers recall, there were times when I mentioned that one had to turn aggressive. Doing that in recent weeks in the small and mid-cap space would have paid off handsomely.
Chart 2 shows the strong moves in the small and mid-cap space. If anything, the trends in this space were even stronger, with nary a reaction phase. Momentum investing would have worked out just dandy.
Right now, everyone is getting worked up about this space, though. That may not be such a good thing, considering that we may get a pullback.
Now, the next important question is: if a reaction does emerge, as expected, how much damage can it create?
Well, first up, I need to clarify that forecasts remain forecasts, and the way to trade them would be to take positions off. Not for going against the trend, please note. So, just because we may hit a price and time target, it is not a cue to go short. Even if you are the aggressive sort, you should still attempt that only after seeing some reversal patterns on the shorter time frames.
For this, the Bank Nifty (I am using the greater traded vehicle here instead of the Nifty) will have to break below 43,815 on futures beyond June 13. Once it does, the downtrend shall be set in motion, and this can then carry on till June 20–23 and take the Bank Nifty down to a price level of at least 43,100. This will represent a fall of 3.5% from the highs. One can expect, then, that the Nifty may also do some 3–4% decline, which may bring it down to 18,100, which is the former swing low area.
Looking further out into the future, it seems to me that a decline that may set in now has the possibility of running into the end of July or even spilling over into the first week of August 2023. So, we should certainly be paying heed to what happens in the next week.
It may not seem much to some, but it is important from the point of view of what has been the habit developed over the recent months, which is to short-put. And, if I examine the derivative positions through the end of the week, I still find a very large position of short index puts being held by retail clients. Short against them are FII and pro traders. So, this is the Achilles heel of the market. I expect this position to continue to build even higher as we still have two more days to go, and possibly the market may look up some and induce more put shorting by retail. This is a position I will watch very closely over the coming week. They are also long in stock futures and calls. So, the net retail position is long and is therefore liable to be caught by a squeeze if there is a sudden turn in the market.
Every time, we look at some sector index that shows strength. This time, for a change, let's look at a sector that is depicting a weak underbelly—and that is the IT sector.
Chart 3 shows the weekly set-up in the IT index. There are some Gann support lines drawn, and it is noted that these are broken. Index has been making a ledge over the past many months, hugely underperforming the rest of the market over the last year or more. Where support was expected to come in, we found resistance gathering. This is usually a bearish signal for more declines ahead. The momentum readings on this weekly chart are pretty woeful. The next time count is far away, in March 2024. So, until then, the IT space is expected to remain under pressure. The target zone is around 23,500 levels, which is a clear 15% below current levels.
Those looking for in smashed IT leaders will be in for more disappointments. Already, these stocks are down 25–30% on average. A few of them have rallied a bit. Some mid-cap names have fared well, perhaps owing to some niche business areas. But realise that even those may not be able to reach the heights that they could otherwise reach because the sector is facing a tailwind. So, if you are making some decent money on such names, I would suggest that you take some money off the table. The leader stocks are active in the F&O segment and can provide hedging opportunities against other longs that you may be holding.
Therefore, we await some signals from the market in the week ahead, and we can take our cues from those. I have already recommended that long positions should be eased out. Whether any new directional position is to be taken has been signalled through the levels indicated for Bank Nifty Futures above. The minimum move that is expected to emerge from that has also been specified. Go into the next week with light positions, ready to act if the market signals us to do so.
CK Narayan is an expert in technical analysis, the founder of Growth Avenues, Chartadvise, and NeoTrader, and the 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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