Nifty This Week: Technical Charts And More – What The ‘Sentiment Indicators’ Show

The chart below shows the almost one-way street of the market in the last two weeks. That’s not altogether a bad picture. In fact, had one been ready for it, then the gains would have been pretty decent, as the breadth accompanying this advance was also pretty good.

So, here is the thing. Everyone thinks that the markets are all about fundamentals. They are and then they are not. There is also the technical side of it because the fundamentals can only explain or account for the long-term. There is a third element as well – which is sentiment. Very few look at this one as something of importance. But it is actually of immense importance because it decides how much the fundamentals or technical will reward you.

On a ‘good’ day, sentiments boost your profits while on a ‘bad’ day, they can exacerbate your losses. Most know it but many don’t know how to factor it in. In the last week or two, there were no fundamental inputs that prompted such a gain in a short time. So it was to be labelled ‘technical’, ‘oversold bounce’, or some such euphemism that people use when they haven’t a clue why.

Since bull and bear phases of the markets are essentially an expression of sentiment through the movement of stock prices, it is important to map sentiments. People tend to dismiss it as emotion, irrationality, fear, etc. All those who play on ‘gut instincts’ are actually playing on sentiments, because the gut feel is pure emotion and nothing else. But if you ask them, they will deny that they ever play the market on emotions. There exists a lot of hypocrisy in the markets.

Technical factors seek to capture the emotional element through the measurement of momentum and volatility. Unfortunately, fundamentals have no way of capturing sentiment, except perhaps to quote a homily from Warren Buffet or Peter Lynch. You know, stuff like, “when there is blood on the street...”, etc. The point is, how do you even know if there is blood on the street? It is a nice-sounding rhetoric.

So, in that sense, adding technicals to one’s arsenal of tools makes the analysis somewhat more complete. If we have to judge sentiments then we have to find a vehicle or a tool that represents sentiment swings in some way.

One clear indicator of pure sentiment could be crypto-assets. There being no ‘real’ fundamentals to these tradable assets, I would think that the entire movement is happening from pure supply and demand driven by sentiments. People are trying to clothe what they do by introducing fundamentals but all they are doing in my opinion is trying to justify the technical picture with some understandable—or more likely, acceptable—jargon.

Since then Bitcoin has become choppy, declining first into a sharp correction till July and then pulling back robustly to hit a new high by November and then retreating once again till date. One can ascribe many reasons for this choppiness. We will leave them aside as they are opinions rather than facts.

It can be noted on the comparative chart here that while the Dow Jones struggled a bit to continue higher once Bitcoin turned volatile, the Nifty has been doing so comfortably. If Bitcoin represents ‘risk-on’ then the Nifty too was full-on risk-on.

From the November high though, there is a divergence. Both Dow and the Nifty did suffer a bit of a slide but righted themselves quickly and are heading up while Bitcoin is heading lower. The last time it happened, Bitcoin roared back into the trend.

Looking at the Bitcoin chart by itself, it seems that the corrective leg is still in progress. Hence positive feed to the equity indices may be restricted perhaps. There is clear correlation between the risk-on Bitcoin and the two main equity indices. Clearly, the impact is more on Dow compared to the Nifty. Hence one may have to consider that the Nifty is running more on local sentiments. We have already seen that the negative foreign portfolio investor flow had only a limited impact on our market trends as both domestic institutional investors and retail money were up to the challenge.

So, if it cannot be Bitcoin, then it has to be something else. That something has to be something more obvious and overt, such that most people can understand the impact. Quarterly results have been favourable so far and Q3 FY22 numbers that will begin to flow in from next week are also expected to be decent, mostly. So one doubts whether that can trigger negative sentiments. There is an air of expectation about the union budget and people are therefore unlikely to let go at least till the budget is understood and digested somewhat.

We spoke earlier about momentum and volatility readings being tools to measure sentiment or gauge it. So see what the momentum indicators are saying about the Nifty.

The next chart shows the monthly oscillator picture.

Here we find everything to be rather hunky-dory!

All the three oscillators used (Relative Strength Index, Directional Movement Index, and Moving Average Convergence Divergence) are all in fine fettle showing that trends are in great shape as yet, the 12% decline be damned. So trouble, if it exists, is only in a lower time frame.

Let me drop down to the daily chart (skipping the weekly, where too things are pretty decently placed). This chart shows the oscillators on a daily set-up.

Here we have a mixed bag.

The RSI maintained an 80-40 range even during the recent correction, confirming that the bulls were not shaken. Now the rally is on and seems to pack enough punch to sustain. But the DMI line shows bearish dominance is yet not overcome, despite the strong rally of the last two weeks. With the Average Directional Movement Index line remaining down, this is suggestive of some consolidation ahead.

So here too, sentiment comes out looking positive. The daily MACD is into positive territory, in line with the ongoing two-week rally.

There are yet other indicators in technicals that can use price action combined with other tools to create a Sentiment Indicator directly. These are specialised indicators. The next chart shows one such indicator. It can be noted that the bottom of March 2020 and immediately after was heavily identified as being a strong ‘fear’ region. This is shown by a large ellipse, within which note multiple red bars, indicating a sentiment low point.

After that, there are a few more ellipses marked for smaller reactions and advances. A sentiment high zone was marked (ellipse with a G, September 2021) but a big reversal signal has not yet been displayed by the indicator, meaning that the high at 18,600 may appear to be a big top, but in terms of measured parameters, it is still not of the dimension of the March 2020 low.

Getting back to the main narrative then, there are no overt problems with the fundamentals, all figures are pointing to times having become better and likely to continue. The worst of the pandemic seems behind us, and the Omicron variant is being taken by the market in its stride. Q3 results may tip the scale some more if they are good. The technical set-up is quite okay too. The limited extent of the correction (not even 23.6% of the full rise) implies that this is certainly not a trend reversal. It is just a correction. The India VIX remains range bound so there seems to be little fear in the market about a reversal. Momentum indicators are more suggestive of consolidation than big declines.

Given all these, we may see the market becoming more stock-specific in the coming weeks with frequent sector rotations. While trend followers may find that a bit disconcerting, it can also be a great time for faster-moving players. It is, therefore, time for action and to follow what Jethro Tull set to song, from a nursery rhyme, in Songs from the Wood.

♫Jack be nimble, Jack be quick

Jack jumped over the candlestick…♫

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.