Market Technicals: Sentiment Gives It A Boost

A lot of people were scratching their heads about why the market went up so much on Monday? It was actually a non-negative budget. Most felt that there wasn’t anything new or majorly positive about it. Now, the commentaries were coming in thick and all positive! Most of the time, the commentary post budget is largely determined by how the market fared. This time, a 10-year record was broken when the market showed a gain of 5% on the day. With markets up, the commentary is bound to be positive too and those who want to sound bearish too would be guarded in what they say. And those who were positive would latch on to anything even marginal to pipe it up!

It’s not just the stock price that has momentum. Everything in life owes momentum a lot – good performance leads to the attraction of more followers and that is a positive loop. It shouldn’t surprise anyone, really. After all, the market went up for nine months on a trot on momentum – quite unmindful of the pandemic and what anyone thought or felt about its impact. It didn’t matter what caused the momentum – just that it was present! This is one of the main reasons why prices keep rising or some stocks just keep moving higher and higher despite valuations getting crazily stretched. As they go higher everyone wants a piece of that action and most of those who have it do not wish to let go.

You only need to accept that it is so. But it has been drilled so deep otherwise into everyone’s heads that it is well-nigh impossible for people to accept. Look at it this way, if you want. Fundamentally strong stocks sometimes get way over-stretched in valuation because a new momentum to valuation appears. And persists. People find reasons, justifications, excuses, and some sort of logic to explain their actions. We have seen these happen time and time again. Leasing stocks in the 1980s, commodity stocks in early-1990s, tech stocks in 2000, banking stocks in 2005-10, pharma in 2015-16, mid caps in 2017-18, and major blue chips in 2019-20. It will never cease.

To get a grip on the new momentum, I think one needs to go into the market situation pre-budget. The day was preceded by six consistent sessions of declines. Foreign portfolio investment data turned negative across those sessions and markets got spooked by this – especially since their buying has been the biggest provider of momentum! Looking at the rollover data, it is evident that stock and index positions had got considerably pared during those falling days. As a result of this, the market was going into the budget very light in terms of positions.

Obviously, most of the positions that were being created on the budget day were mostly new longs. Once again, the issue of positive feedback from price moves kicked in. Banks and Bank Nifty set the ball rolling. Now, we know from past experience that banks have one of the highest influence on changing sentiments. So as the Bank Nifty rolled along, it ignited the sentiments in other areas. The more prices ran the more the sentiment got a boost. By the end of the day, everything just ran.

Those clues that lead up to the budget, where we had some warning that a drop in prices was getting set up was pointed out in the Jan. 23 article. Hey, you got to allow me to blow some of my own trumpet! How would you know this column is even remotely useful to you?

The warning also included canceling any holiday jaunts! I quote, “So, if you are a serious player of the market then you had better shelve any Goan holiday plans or taking some time out etc. as the market is about to play its next hand. You really don’t want to be missing that”. Those who paid attention could have avoided the big hole it blew into a (particularly) trading long portfolio. And we could have been a bit more ready for what occurred on Monday. Moving forward, we could now expect some repair.

How far do we look at the rally? Most would prefer a new high! Before going to the chart, here is something else that was mentioned in that last article, “Note here that a failure to pull the bear switch—when the situation is supportive of that—will be a redoubled signal of bullishness. This is one of the curious aspects of the market that newer traders don’t understand. Weakness shows because longs unload and adventurous shorts appear. Both of them act in anticipation of a down move. But if that expectation fails then you have three sets of people who shall now become active to the upside.” Is that the case here? Quite possibly.

Let’s see what the chart says.

A nice powerful up candle is always a good signal of some rallying attempt. Now, when it carries, in one swoop, to the 62% retracement zone of the fall, one of the two things will happen. The prices continue higher or they start moving sideways, consolidating the gains. The chart also shows the Relative Strength Index. The reaction dropped it into the pullback limit zone near 40 and now the rally of Monday has carried it to 56. A rise that is able to continue and pip the RSI past 60 levels now would be a signal that the rise should continue. However, if the RSI is unable to make it past and hold near 60 in the immediate future, it would tilt the balance towards some consolidation type move. So, I guess, the jury is a bit out on that as yet. But this week’s move will make this clearer.

Now – a caveat. Note that if the rise doesn’t carry on much further, then the prices have actually created a lower top compared to the January high! That will open a different can from where something not altogether palatable shall emerge.

Anything that may provide a reprieve? Well, not too likely. Bank Nifty smashing previous highs and heading out higher on large new momentum is certainly a big positive. However, mid- and small-cap indices are up but nowhere as near in strength as the Bank Nifty. Hence we infer that while banks drew max juice out of the budget day, the broad market has yet to get into a brisk stride. This shall also be something to track during the week.

So, I end this by asking readers to do some work rather than supply ready answers! It is important, for it makes a difference between continuing the correction (not happy) to punching up to new highs (very happy!). Staying above 14,360 would be positive. Dropping below 14,000 area again would be a warning of weakening of the bullish resolve. Since Bank Nifty has been in a robust mood, it might be worthwhile concentrating on that index a bit more compared to the Nifty 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.