Nifty In Technical Charts: Wince And Bear It

It is not as though people are wrong. Every single sentiment indicator at the moment is screaming “Oversold”. But importantly, sentiment indicators can only do that. It requires the emergence of fresh buyers to create new price action. And over the last few letters, this is one recurring point- that we should be focusing on what is happening- both from a bird’s view and from a ground view. There is far too much tumult that is going on right now and emotions are running too high.

Trader’s emotions are high because they have not been making money, as most of them are bulls and going long in this market- at whatever price- would have only led to losses. Switching to shorts is not so easy for many traders- even seasoned ones. So many have chosen to stay out (largely) and then regretted not selling. Investors’ emotions are running high too. Those trapped in stocks at high prices are in panic. Those sitting on money are too scared to put them back to work.

But the worst off are the ones who leveraged to buy stocks over the last many months. In fact, they are the ones that are carrying this trend lower every day. A large number of these are the new entrants after 2020. For them, this market is a nightmare, for they had never experienced anything other than robust advances! Now, while the going was good, they all bought and then pledged those back to buy some more and repeated that endlessly for the past four years. Built up a large portfolio and felt good about it.

It is not as though people are wrong. Every single sentiment indicator at the moment is screaming “Oversold”. But importantly, sentiment indicators can only do that. It requires the emergence of fresh buyers to create new price action. And over the last few letters, this is one recurring point- that we should be focusing on what is happening- both from a bird’s view and from a ground view. There is far too much tumult that is going on right now and emotions are running too high.

Trader’s emotions are high because they have not been making money, as most of them are bulls and going long in this market- at whatever price- would have only led to losses. Switching to shorts is not so easy for many traders- even seasoned ones. So many have chosen to stay out (largely) and then regretted not selling. Investors’ emotions are running high too. Those trapped in stocks at high prices are in panic. Those sitting on money are too scared to put them back to work.

But the worst off are the ones who leveraged to buy stocks over the last many months. In fact, they are the ones that are carrying this trend lower every day. A large number of these are the new entrants after 2020. For them, this market is a nightmare, for they had never experienced anything other than robust advances! Now, while the going was good, they all bought and then pledged those back to buy some more and repeated that endlessly for the past four years. Built up a large portfolio and felt good about it.

But when the levee broke on this game, they have no idea of how to unwind this. Now, mostly, the broker is doing it for them. Every day, more and more of leveraged buys are getting sold. And those are all in small and midcap stocks. Which is the reason why that space is caving in the way it is.

Chart 1 is the Cnx 500 that caved in afresh last week to a new swing low, carrying the RSI with it to a new low as well. In the last week I had carried the chart of Midsmall 400 (a large subset of this index) and was hoping that some bottoming may occur.

But no, the market showed no interest. Why? Because the selling of leveraged position was too large. And here is another point- the market has no depth. So even a small quantity of selling is pushing prices down sharply. The impact cost is heavy now. But as prices get pushed lower, it only generates yet more waves of negativity. So, we are caught in a web of our making right now.

I have drawn two trendlines on the chart. Those who think this is some sort of wedge are mistaken. They are just two trendlines. People tend to make patterns too quickly without seeing all the evidence. Then they go ahead and make projections based on those supposed patterns as well! Errors like these should be avoided.

One thing to be done for those who follow charts. Out of the two trendlines I have shown as an example on chart 1, the more important one is the resistance trendline. That is supply zone and if that cannot be overcome then the buying has no strength! See chart 2, hourly chart of Nifty fut.

The only tool you needed (and still do) to trade this market move was a simple resistance trendline. Everything else was useless. What use of any support trendline in this chart? Would it have helped? Of course not- any buy signal failed! Every attempt to go higher has been rebuffed- meaning supply was continuous. Right into Friday. Unless, the prices can work themselves up to cross the resistance trendline (now cruising at around 22500), there can be no uptrend.

In working with trendlines, one should be a bit careful. Often, prices consolidate and that carries it back to near the trendline. If a break of a resistance trendline occurs through sideways movements, it is not to be considered valid. Even in this chart 2, note there are phases of sideways price action that made it look like the decline ended- only to resume! The fact that repeated consolidations could not break this trendline showed how weak the bulls really were! But was that known during trading? Not really. Everyone still kept looking for that support and missed the fact that it was the resistance that was working all the time!  

Now, if we move sideways, say, in the coming week and break this trendline, would it be a source of joy? Of course not. So don’t make that mistake either.

Now someone may say, that is all fine, but what lies ahead? Answer is, more of the same until we find evidence of new buyers. Why more of the same? Because I don’t know if the leveraged selling is yet over. I would wager not. So, any rally, for any reason, will still attract selling.

This can stop only if new buyers emerge. Why new buyers? Because old buyers are all stuck with losing positions- either in futures or in deliveries. So, their willingness to buy is at a very low ebb. Therefore it has to be new buyers. New could be anyone- institutions, operators or retail/HNI. That doesn’t matter. What does, is that buyers need to emerge. Will that happen at current levels or after the market sinks some more? I doubt if anyone has answers on that.

How will we know this? On the charts only!

It will manifest in the form of higher bottoms when renewed selling doesn’t carry so far to create new lows. It will manifest in the form of reversal patterns. It will be in form for divergence patterns that get confirmed by price action. It will get confirmed by price and time nexus not just in indices but also in individual stocks. Etc. Etc.

But all these will also need some triggers and take some time. So, don’t expect anything happen by tomorrow evening! You may wince a bit while it is still on, but you will have to bear it.

Those in pain currently need to just gird up for some more time and do their best to see this phase off. Easier for me to say it than for those involved to do it. But it is what it is. There are no easy solutions. But there are specks of good news also coming thru here and there. The force of the trend during last week did not allow market to factor them in. Maybe next week may be different? GDP growth for Q3 came in positive and it was better in many segments of the economy. RBI and the govt are both making efforts to inject liquidity into the system however they can. Somewhere, they will click one day.

The next time count is next week, towards the latter part of the week (6-7^th). So we have to watch for some price-time-pattern-momentum-volume-sentiment stuff coming together to call for a low. I will be tracking that and if it happens intra week, I will be covering it in on my own site which you can keep track of. Else, it will be covered here in these columns later.