Nifty This Week: Technical Charts And More – How To Not Get Surprised By The Market
Active market players got kicked in the teeth during the week as the market fell four consecutive sessions. As though that was not enough, the market also remained choppy on an intraday basis, alternately raising and lowering the hopes of traders.
Typically, this leads to high confusion about what to do. That dilemma, more than anything else, causes losses. There are weeks when one has to simply take losses and this was one of them. Only some very astute stock-specific activity would have avoided that fate. The first chart shows the intra-week moves. Although decidedly down, there were many intraday raising-of-hopes minor rallies.
One of the reasons why losses occur is because most traders are caught by surprise. This happens especially when the market has been cantering in one direction. The last four weeks, for example, were a nice ride. The market bottomed on Dec. 20, 2021, and then turned around into a nice rally. This rally continued for four weeks nonstop, bringing the Nifty to 18,400 levels, and raised hopes of a new high being punched out very soon. When something like this happens, people psyche themselves up to look for that (much-needed) movement.
As a result, the focus shifts from what is happening (the rise) to what we want (new highs). Our sight then slowly shifts further to only the latter (new high) and starts ignoring other data. In the meanwhile, the market stops going higher, hesitates for a day or two, and then starts down. But, since no one is looking at the change, no one catches it.
The first fall is a ‘mere reaction’, the second day it is ‘reaction is good, has made market healthy’ and by the end of the third day of fall, it becomes ‘oh no!’ It is only when the price action makes it totally evident that it is not following the path that one was hoping for, that people begin to focus back on it. By then, the damage is done, and stop levels are gone and now one is left in the uncertain world of not knowing what to do.
The solution, obviously, is not to get caught by surprise. But sometimes that cannot be avoided. At those times, you use the old market cliché that goes, ‘the first loss is the best loss’. At other times, we need to be prepared. For that effort is required. One can’t just expect the market to do everything for us while we do almost nothing. Anytime we are in a trade, we should anticipate where the problems could come from. We don’t do this because we think only logically and since one has got into a trade using some logic, anything different doesn’t strike one at all.
But intelligent preparation means that one should look at opposing logic to your trade as well. After all, someone sold you that stock using an opposing logic.
Writing analysis is one of my ways of being prepared as much as possible. I make an overall plan for the year, which you read three weeks back, then I shrink it down to the immediate quarter for implementation. That is my map for direction. I then bring it down to sectors and stocks to play those views. This approach seems to work most of the time. Sometimes, the market catches me by surprise and I execute a stop. That is what stops are for. It is very difficult to predict how irrational the market can become. But that matters more than anything. A stop saves you from disaster.
The new trend towards algorithmic trading seeks to remove some of the difficulties associated with trading. But here too some preparation is required. An algo has no emotions. But people are not rational all the time. When losses occur in algos, traders working those algos cannot remain calm and rational. Algos miss the feelings of the trader.
That is a very tough ask. Emotions will always trump statistics. This is why even the best models will not win as they are expected to on paper.
Algos track numbers. Our minds can figure out numbers. But tomorrow is today’s price plus (or multiplied) by a story. Algos cannot capture a story. But our minds do. And this is what plays tricks. When I stated that we have to prepare ourselves not to be surprised, what I really meant is that we have to train our minds not to manufacture stories and to concentrate on what the numbers reveal. Stories can be bizarre reflections of people’s hopes, dreams, fears, insecurities, ever amplified by social media and television bombardments.
The way not to get surprised is to look at the charts. Since a chart is made up of numbers, we are looking at facts because the numbers emerge from facts. The concept is pretty simple. So long as people want to own anything and go after that, it will have increasing value. Since March 2020 people have only wanted to own stocks. Now, do they still want to own them? I don’t see that they want to disown them. This is why sell-offs are shallow and limited. The last few days have seen the market go down.
Who is selling? Largely trading longs being liquidated, not portfolio liquidations.
So long as the want is still there (mid-cap and small-cap stocks continue to surge even now), there should be no surprises about deep corrections. Markets will always have those small pullbacks on trader readjustments. We have to simply sail through those.
Charts tell you the story without spinning a yarn around it.
The longer-term (weekly and monthly charts) are still quite undisturbed. Hence the minor squiggles need to be left to the day-traders. For them, those are magnified because they have their noses close to monitor screens. Hence, no surprises in store for the positional trader or the investor. The unprepared trader gets whacked every now and then when he fails to anticipate. But that is part of his game and he has to learn to deal with those. So long as we don’t spin a story out of our charts, we are good. The problem with fundamentals is that too many people spin too many stories with it. Traders can’t afford that.
So, a down week, where traders took a hit perhaps but the overall scenario still remained intact. With the union budget a week or so away, we should not be expecting too much weakness. The market should revive from early next week as it will shift focus to the budget and perhaps away from global variables. Earning announcements flow will continue to ensure stock-specific activity.
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.