Last week ended well, encouraging us to look for a revival. It was dependent on whether the market would show follow-through action or not. Hence, everything was pretty tentative where we left it last week. The first two sessions of the week did not exactly warm the heart. In fact, Tuesday’s dip almost seemed like it would go back to the earlier days of continued declines. Then, out of the blue, we had these super upside gaps on successive days that managed to save the day, sort of, for many of those who were stuck with positions from earlier, while rewarding those that were courageous enough to have created some longs at lower levels. The first chart, as usual, shows the pathway through the week.
While the previous week was tough to make money despite the good finish, this week just gone by may have been far better, if you managed to survive the sharp dip of Tuesday.
Hence, you made money if you were long coming into those gaps but not after. Thursday seems to have fared a bit better and I would reckon that smacks some of the shorts throwing in the towel. With a long weekend and the Ukraine situation cooling off just a bit, shorts may not have wanted to chance another gap up. But the new longs also would have thought along similar lines. They too would have scooted with whatever profits were on the table.
Hence, it seems that the market may be quite neutral in terms of positions. Such a market would be ready to move in either direction, depending on how the news builds up over the long weekend. Two big gaps have restored the confidence and that will help people take long positions if the market opens higher. At the same time, prices are better now in many items so if something goes wrong, then people would be ready to take some shorts too. Therefore, news over the weekend is going to be a decider this coming week.
We looked at some sentiment indicators last week and built our case on two different ones – the daily reading Very Heavy fear and the weekly reading of Hopeful. The upward move of the week managed to pull the daily readings of sentiment to Fear. I guess that is a bit better. The weekly has moved to Neutral, which is a kind of upgrade on Hopeful.
So, all in all, we have to say that there has been some repair to the sentiment but perhaps not as much as is necessary for us all to breathe easier.
The next chart shows the sentiment indicator.
The chart also shows another trend check oscillator. It has two components: a trend indicator (lines) and a trend strength measure (arrows). We have the trend indicator just about staging a turn, with the short-term indicator cutting upward but all three trends are pointed down still. Hence, the trend strength measures are still placed at the bottom.
If we shift our focus outward and look at what the Dow Jones Futures are telling us, then the news is quite similar or worse. The third chart shows the Dow Jones situation, using the same indicators as above. Note that the sentiment there still reads Heavy Fear. Even Bitcoin charts have been unable to shake off the pressure.
Together, these pictures tell us that bulls are making an attempt but have much to do before the bear can be seen off.
Last week, I had stated that “the first order of business is to climb further and regain territory above 17,000”. This happened but through gaps. Gaps don’t induce the same level of confidence as when it trades through those levels during an active market. Trapped longs have got a chance to exit. Some bolder people have made some money. Shorts have been cut.
We are all happy if markets go higher. But prudence demands that we also protect the downside. For that, we have the setup shown in the fourth chart where a trailing stop type indicator shows two levels 16,470 and 16,783 at the start of the week as the area that should ideally hold during any pullbacks.
So, with around 16,500 as stops, we can play some longs.
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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