Nifty This Week: Technical Charts And More – What A ‘Breakout Of A Breakout’ Signals

Lagta hain breakout failure ho gaya!

Bulls are unable to force their way upward…

I don’t know when but when the crash comes it will be severe…

And the like. Not just from one but many. The chorus for ‘failed breakouts’ would have been the highest on Tuesday and Wednesday, when the market turned soft. And then, when the market sped away without giving these gents a chance, some more lines like the following would have emerged.

These operators are scumbags!

There is no logic only in this market!

I told you that this is a buy-the-dip market!

Certainly, a roller coaster initially, followed by a take-off. This is how the week was, on the charts.

In last week’s article, I had written about the gains in the earlier week when the index made the breakout and asked how much of the gain did one pocket? In this week too, we have seen a decent range (340 points) and it is well worth asking whether one was busy asking questions, making comments like above or actually getting in there and try and make a buck?

I don’t know how many of you have seen or remember an old movie called The Good, the Bad and the Ugly. In that film, there is a famous scene that I am reminded of as I write this now. Two guys, each wants to shoot the other. The first guy has to advantage but he gloats and delays. The second guy shoots him and says, “When you want to shoot, you shoot. Don’t talk.” Over the last two weeks, this market has been like that -- just shoot, don’t waste time talking. And your money would have been in.

Interesting to note from the participant-wise trade detail file that the NSE provides, we find that on Aug. 10 and 11, retail trade (“Client”) jettisoned their positions, which is typical. Like we have been seeing all through the last many months, the long positions on a day-to-day basis are being carried by weak hands and they get shaken out rather easily. Whether the because of lack of margins or lack of other resources or a lack of knowledge etc. they do get forced out. It was also interesting to note that foreign investors actually reduced their shorts (covered) on Aug. 11 during the fall. So what the retail threw away was probably picked up by FIIs and some. We can see what happened subsequently. Devoid of weak hand positions that take profits on the way up, the market was an easy move to new highs. Ab batao, breakout fail hua kya?

The problem is really only of our making.

The identity of a lot of people in the market is still one of disbelief, that the market can go up so much in the face of such calamity (the pandemic). The tighter you cling to your current identity, the harder it becomes to grow beyond it. In and through various columns, I have voiced some misgivings a few times when it seemed like the trend was overstretched based on technical parameters. However, each and every one of those was also caveated by saying that the market has to break levels and hold them. That the market never did, not even once.

What was—and still is—required was a change in the strategy. Normal yardsticks that we used to measure moves, normal yardsticks of valuation that we applied to judge a stock’s merit, normal yardsticks that we utilised to gauge the sentiment and money flow—especially FII flow—all of them fell by the wayside. The mistake that many made, or perhaps are still making, is that they just worked harder on their old model and strategy without bothering to check that it is not moving the needle for them.

In the meanwhile, new entrants, not hindered by history, not burdened by analytical necessity (it has been a one-way street after all), and with plenty of money and no fear are laughing all the way to the bank. Old-timers are struggling and only happy that their earlier portfolios are making money for them. Huge moves are happening in stocks but most people are unable to hold on as many of those are ‘unknown’ stocks, and hence considered dangerous.

This is why it was easy for those with a lack of baggage to buy the ‘breakout of the breakout’ and make merry at the end of the week. See the next chart for this pattern, first coined by WD Gann if I recall correctly.

Gann went on to say that such a breakout of a breakout leads to more gains ahead. So we do have something to look forward to. If using this old master’s technic, then the projected target of the current move shall be 16,650 and a possible date for that to be achieved would be around Aug. 23 or Sep. 3. Or perhaps one can use the extension of the initial swing (another Gann method) up from the March 2020 low and project it higher to get a target zone of around 16,950 levels.

While there are many ways to make higher projections, what is more important is what we are going to do with them. People are often prone to ask for targets, without having the slightest idea of what they will do with that forecast. Similarly, even if we make a forecast (which we are not; we are just pointing out possibilities here), unless we are clear how to play that forecast it really becomes irrelevant, doesn’t it?

The only thing that can be said, and one which may be useful to most traders and investors, is that there are higher calculated targets possible and the market is doing everything to reiterate its bullish intentions. So, our duty is only to follow what it does. We have a destination with a target figure for the Nifty. But we all trade stocks so we should make plans to invest and trade in them effectively. The target is just a background figure for us to carry in our minds.

One of the dictums I always follow are wise words by Robert Miner, a great author and market trader in the United States. He said, “Follow the markets and not your forecasts”. Miner made many forecasts and still does. But he checks for the market to validate them with its action. Currently (since March 2020), the market has been validating a bullish view. We have outlined some higher possibilities in this letter. Our job ahead is to see whether the market continues to validate them. So long as it does, all we have to do is hold on to longs and continue to create them during dips.

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.