Finally, some relief from the battering that the market took over the past few weeks, particularly recent ones.
One of the features of recent times has been - wide, opening gaps. There is completely no defence against a wide unfavorable gap and it upsets any or all calculations that one may have made. For those that the gap was favourable—meaning those that were short—it was serendipity and they should have gobbled the profits along the way. We began the week with a deep gash on Monday but then managed to right the ship with a recovery that started Tuesday and continued till Friday. This time around there were upside gaps. Either way, overnight positions were proving to be hazardous for traders. Here is how the week’s trading looked as it unfolded.
One of the features of recent times has been - wide, opening gaps. There is completely no defence against a wide unfavorable gap and it upsets any or all calculations that one may have made. For those that the gap was favourable—meaning those that were short—it was serendipity and they should have gobbled the profits along the way. We began the week with a deep gash on Monday but then managed to right the ship with a recovery that started Tuesday and continued till Friday. This time around there were upside gaps. Either way, overnight positions were proving to be hazardous for traders. Here is how the week’s trading looked as it unfolded.
Optically it may seem like one could have made money. You did if you bought and sold on Wednesday. That was the only day there was some trend.
Tuesday, the sentiment still remained battered that hardly anyone would have ventured to go long and hold overnight. Thursday a wide gap up offered an exit to pending longs but if you missed that then profits were trimmed. Fresh trades on Thursday and Friday may not have worked much if you were a quick turnover trader.
Was there enough support at the recent low? Well, there was the 62% retracement of the leg up from the April 2021 low to the all-time high. We have been tracking the down move using pitchfork and prices were caught in the internal channel of the main pitchfork. Also, a mini pitchfork using minor pivots faced downward also caught the low on a channel expansion.
These are encircled in the chart. They do a good job of catching a low, provided one is ready for it. Else, it all becomes post-facto explanations.
In the column of two weeks ago, I had indicated that the 15,700 area was the zone where some clusters of supports were present. When the index made a Doji-candle on March 7 and then produced a reversal candle on March 8, it was reasonable to expect some recovery. Note, in the lower panel of the second chart showing the supports, a sentiment indicator has been added. It read Heavy Fear at the low, denoting an extreme in bearish sentiment. Ideal for a reversal.
What next?
Let’s look at the immediate next higher time-frame picture, the weekly.
Commenting on the trends a couple of weeks ago, I had mentioned that the 23.6% retracement was just being reached and had indicated the importance of that support. I am repeating that chart here with updates. It can be noted that the retracement support has held and a nice, green candle has appeared for the week at this level. So, all eej well, then? I have added the sentiment indicator here too and note that it now reads ‘ Hopeful’. This is because the indicator has retreated towards its mid band and pretty much describes the sentiment in most minds - hoping that we are done with the fall.
So, if the lows of last week 15,676 hold then we may see some attempt to rally further. At the end of the week, we just pulled back about 38% of the fall. Some good news flowed through. BJP swept four out of the five states that had elections. That ought to quell some fears. The main fear input, the Russia-Ukraine war, also stopped making the big headlines and as the world got together to stem runaway crude oil prices, which dropped sharply, the other fear commodity (gold) also receded. Bitcoin, a risk-on indicator, rallied but that was helped by some resolution passed in the United States. Nevertheless, when associated indicators react in a similar manner to suggest that the fear may be receding, then there is a reason to hope.
Now, the support zones holding, etc. is meaningful for those who are going to invest money afresh. It is not so relevant for those who are holding a portfolio and have not sold and have no real plans to do so. But those were the most voluble, mainly because they wanted to hear that their suffering was about to end.
Supports holding is just part of the story. Long portfolio holders need the market to go up and for that to happen, many more events inside and outside the market need to occur. We can list many of them but that is unnecessary. Most of all, we need to see some tangible relief occur in the war. The rest may start taking care of themselves after that important element is in place.
For those that bought near the lows, good going, and the stop would be near the last lows made. Those that were trading need to have trailing stops as the market is not yet out of the woods, so to speak.
For the week ahead, the first order of business is to climb further and regain territory above 17,000.
That will create some more sense of confidence. No one seriously expects the market to make too much headway and hence higher levels will meet offerings, either from old trapped longs or new shorts. It would be important to see how far that selling—as and when it comes—pushes the market lower and with what kind of breadth. Improvements from lows are well-depicted or captured by improving breadth, particularly during bottom retests. So that is what I would be watching this week.
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.
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