Nifty This Week — Technical Charts And More: The Market Evidence That No One Believed

It has been one of the worst times for traders and investors as the markets slid for the fourth week in succession. The earlier held expectation that the Nifty’s 16,800-17,000 area would be defended went for a toss and that set some further moves in motion. All the longs that had been built in that area—either through futures or short put options—had to be unwound or hedged afresh and this took a further toll on the trends. By the end of the week, we wound up sharply lower, finishing around 4% down. The progress during the week is shown in the first chart and we can note that it is a continuation of the lower top and lower bottom formation that has been in progress for a while..Long ago, the legendary American trader Jesse Livermore had said, ‘Everything you need to know is right there in front of you’. Let’s take trends, for a start. Since October 2021, the Nifty has been making lower tops and lower bottoms. The fact that it was making these wide swings probably lulled many of us into thinking that ‘all ij still well’. See the next table for the recent swings..We also saw the fact that the dips were larger than the rallies and that the rallies too were happening swiftly and declines taking longer- which is typical within a bearish phase. The pattern was there, the associated signals were there but most preferred to look the other way. Writing around five months ago, this is what I said: The high was recorded a month ago, on Oct. 19 and since then we have also seen a dip and rally to form a lower top and now another dip. So, now if prices go below the Oct. 25 low of 17,569, then we will get a lower top-lower bottom...No doubt, the rules of technical analysis do say that pattern is supreme. Changes occur in the smaller time frames and burgeon into bigger ones later. So, if the pattern occurs, then it is a warning. But along with a pattern, associated signals have to be triggered as well. When calling for a larger correction, one of the primary elements to look for would be price damage, because that is what would tell us that long holders are determined to sell out, even at lower levels..So, Livermore was right..We had evidence of a turn as early as November 2021. But problem was, none of us wanted to believe it..We all had seen such a good time for about 18 months that no one wanted the party to end. The next chart shows the daily chart (still annotated with the pitchfork I have been using to track the moves)..Was there any other pattern that was missed by the market-men in the same period? Perhaps. It was the FII selling vs the DII+ retail buying. Even the union Finance Minister joined the chorus singing paeans for the retail investor. But the facts were a bit otherwise..FIIs have sold 25% more than what the DIIs have bought. Presumably, the balance of buying has been from the retail pack?Now let’s look at the impact and derive what it means. From November 2021 to April 2022, the Nifty 50 fell 15%, midcaps fell 19%, and small-caps fell around 20%. Notably, the high in the smallcap index was made in January 2022, so there the decline has been sharper, taking less time and falling more. So, the pain has now been more pronounced in the midcap and small-cap areas. These are the playing grounds of the retail investor. It would be quite reasonable to conclude that the retail trade is now stuck with much of its purchases as prices have largely remained down. Hence retail’s ability to funnel more money into the market would be a bit difficult..If the FII selling continues the way it has been and DIIs continue the way they have so far as well, then the market, now absent the big push in by the retail, may continue to slide, perhaps even more than it has..Now that is a worry. But that is what is in front of us. And like ole Livermore was saying, that’s all that we need to know, right? While we are at it, take a look at the pitchfork chart once again. We can note that the prices are headed for the lower channel of the pitchfork. That is evidence in front of us too. Now, the question is, whether that support will do the trick? The RSI just broke thru the 40 levels and that hints at the support not holding. That too is in front of us.Writing on April 2, I said: “The next target zone is seen at 18,050 levels and we can look forward to those areas in the coming week. We should be looking for the oscillators to improve further during such a continuation of the advance and that can enable it to continue or persist. One can raise the stop to 17,000 levels and continue to hold long. If markets go higher, the trailing stop can be improved up to 17,300 levels during the week.”The market peaked by April 5, just short of hitting the 18,000 mark, and turned down from there. In the process it broke through the 17300 levels, doing it with a gap on April 18. That was a big warning and prices have never recovered since..Together with all the elements that we have been discussing over the last few months, the breaking of the raised stop was the key trigger..So, we had enough warnings and targets that fell short and stop-loss levels that were triggered. The question is where are we headed next? It may be time to consider whether we are having some large degree action going on here. At the March low, we had seen only a 23% retracement of the entire rise from the 2020 low. If the March low is lost then we are staring down the barrel at the next one (38%) and that puts us way below the current levels. So, the picture is not a good one for those holding longs.Now, here is what one can do. Those with long portfolios that they don’t want to give up on, buy some protective puts. For those that aren’t so particular, shed some of the stocks and move to cash. For those that habitually trade long in futures, take a breath and stop, while matters become clearer. Those that can go both long and short in futures, be biased more to the shorts than to the longs (where only some high conviction ideas should be played). For those that want to play for the big move, buy puts or create spreads, maybe try a put back-spread if you wish to play for a breakdown below any particular level.Lots of ways to approach it. I guess I have covered most of the plays that people make in the market. Now it is the market’s turn. So long as we are ready with some strategy at least, chances are that we won’t be caught sleeping. And of course, now we have armed ourselves with something else too: Livermore’s advice. We do need to just keep looking at what is out there to know what is happening. Now what we think may be happening..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.

Nifty This Week — Technical Charts And More: The Market Evidence That No One Believed

We had enough warnings and targets that fell short and stop-loss levels that were triggered, writes CK Narayan.

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