Nifty Technical Charts And More – Equity Traders Need To Watch Bonds And Currency Markets
Most people want to be told about how high the market will go and their interest in knowing about the lower end of the fall is only from the perspective of whether they can buy over there. This is the innate nature of most participants, so the comment to offer in a strongly declining market is limited.
Last week, I wrote about the big swings that are occurring in the market. When you look at it in an offline mode, they all seem manageable. But living through the event creates some mental issues for most active players and their moods keep swinging from one extreme to the other. Here's a blog post on this syndrome, offering some insights into how to avoid this kind of thinking.
The markets continued to fall during the week but staged a small rally on Friday. The first chart depicts the moves. Much of the losses occurred through opening gaps and that is often disconcerting. There were also late-day declines. Any rallies that occurred (such as the one on Wednesday) were sold into immediately. It seems that by Friday, much of the longs were thrown and so, the end of the week saw a small rally. But even that small bit was not held and prices wound up near the Thursday lows. The ongoing decline from April 5 simply continues, unabated.
Another small reason could be that the sharp fall brought the Nifty down to tap into the median line of a changed pitchfork. See the second chart, on the daily movement. By the end of Friday, prices fell back and so the attack on the median line is still on.
There was no improvement on the weekly charts though, as the rally was too little and too late for the weekly candle to change. So, we are left looking for follow-through action in the next week for some hints of bulls getting back in the game. As the median line slopes lower, it may be difficult for the Nifty to break it (especially on the weekly) without some further strong moves. Some negative triggers may be needed for that to happen.
The fact that the last swing-low of March 7 was not breached can also be taken as a minor positive. But how much? That March low is within shot right now and one gap down can probably take it out. One can find positive divergence in the hourly charts and this may be of interest to traders. Reaching prior swing low supports and resting on median line supports and creating momentum signals on intraday charts is at least hinting at some corrective rally in the making. What it will need is follow-through price action. So it is a toss-up whether bulls will find the courage to push it higher on Monday? We will simply have to wait and see.
Many newcomers have been scratching their heads as to why the market is falling so much. After all, results have been decent for the last quarter (about 60% of the companies reporting improved numbers so far) and the war scenario seems to have quietened down some. So they continue to hold and perhaps some are still pursuing the old habit of buying into dips. It worked earlier, right, so why should it not work again, is their plaint? But most of these newbies don’t realise that the market is always living in the future, and they keep taking cues only from the past.
Right now, the market seems to be wrestling with prices having overrun fundamentals in many cases, higher inflation, increasing interest rates, a weaker currency, and insipid commentary from big companies declaring results, etc. This is not just domestically, but overseas too. The U.S. markets are seeing a big sell-off, and the Nasdaq is into some kind of a free fall. Collectively, all these are making the smarter set of investors warier of pushing money into the market. Even though the April figures for systematic investment plans and flows in mutual fund coffers were a continued positive, there has been a sharp decrease in the quantum. That itself speaks of a slowed mindset.
If you recall, it was the U.S. 10-year bond yield surge a few months ago (September 2021 and again in January 2022) that started the nervousness. It has been progressing pretty well since and hit a high at 3.20% by May 9, 2022. Now that is a pretty brisk move for something that had been lying around dormant for years. As of now, the chart of the 10-year shows some profit-taking coming in. The third chart shows the trendline support of the fast rise from the March 2022 low being broken and the RSI also into a divergence at that high. Now the yield move down is accompanied by a lower RSI. Although there is a possibility of a positive reversal pattern developing in it (if a 2.72 close is not taken out), one may not want to bet on it.
If the U.S. yield rates soften, we may see some reorientation of the moves in different asset classes towards the recent mean across the coming weeks.
One thing that history has taught us is that excesses happen in both directions, up as well as down. In March 2020, the Nifty hit 7,525 amid ample liquidity across the world. The pandemic had started creating confusion but the smart set realised that stocks were available cheap. In 18 months, we hit 18,500 levels. The smart set once again seems to have smelt out some excess here though most of us didn’t. What was it? Maybe crypto-assets, with youngsters going berserk on them? Then something completely new, NFTs. That created a buzz but if you ask the average guy, he won’t even be able to tell you the full form of that. But still, many spoke about it as though it was the next new best thing. Maybe this emerging market theme itself turned into an overvalued asset? FIIs appear to think so, and have been pummeling Indian equities for the past 7 months. Be that as it all may, people who smelt some excess have moved out to an extent as to cause an average decline of 25-30% in blue-chip stocks and 35-40% in small-cap and midcap stocks.
One of the reasons our markets are down is because the currency has been so weak. It finished at its lowest ever during the week. No one is really too surprised (talks of Rs 80 to a dollar have been around for a long time). But how many of us really did anything about this fact? Almost no one. Therein lies the crux. We all know many things but we act on so few of them! Here is how the Dollar-Rupee chart looks as of now.
It can be noted that the pace of the dollar rise has been sedate and gradual. The pace has not really picked up, the median line has not been penetrated except once. Typically, when prices take too long at the lower channel without breaking past the median line, it usually signals the move to be somewhat weak in bullishness.
If that does happen, then we are possibly looking at a bleak situation ahead. But so long as that doesn’t happen, we may yet squeak through for a rally.
So from mere price-watchers or market-watchers to get the clues traders are now being forced to become currency watchers and bond yield watchers. The equity market is steadily becoming global and all of us are being pushed towards global news-flow as well. It is no longer an option, progressively all these will become a compulsion even if we are going to trade in just the Indian market.
As stated earlier, we need to wait for the market to show some sort of follow-through action upward on the set of tentative signals to come through – median line support, divergence on the 60-minute chart, etc. The default setting of the trader’s mind, therefore, has to continue on the bearish trend. One of the best ways to stay more aware is to always have an alternate thesis that proves the main one wrong. Right now the main thesis is the downtrend and the alternate is for a rally to be cobbled together. There is, therefore, no point in looking at this level or that. What needs to happen is a kind of composite pattern – where price action, chart pattern, overseas market action, news-flow, order flows, etc., all need to come together. So let us be watchers for now. Get your binoculars out.
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.