Market Technicals: After The Sucker Punch, A Ray Of Hope For Traders?
A man looks out a city skyline shrouded in haze. (Photographer: SeongJoon Cho/Bloomberg)

Market Technicals: After The Sucker Punch, A Ray Of Hope For Traders?


It happens every time. The market gets socked in the face and goes down, seemingly for the count. On the first day, it is a pullback. We need to buy. The second day, it is an opportunity. Wow, buy this dip. By the third day, it is uncertainty. Buy at so-and-so support. On the fourth it is a reaction. We should wait to buy, this is healthy. Fifth, it seems like a short-term decline. Oh, the market looks like it is going to pull back some more, so better to wait. The gap on the sixth day becomes the end of the world. OMG, this thing is going to collapse now.

What you bought on the first day of decline (0.5% down) is, by the fourth day, some 4% down and you are cursing yourself for having bought too early. But now you are long, and clueless on what to do with it. By the fifth day, the enthusiastic buy on day one looks like a huge mistake. Then the gap on day six does it... dump that stuff, goes your call to the broker. Does the story end? Not quite.

After the big gap, the market bottoms and starts a comeback. The one that you dumped is into some rapid recovery and is now 4% up from where you sold! More curses. Then watch with stupefaction as it rises 7% higher. Now wail, to anyone who is ready to listen. But, but…the other guy has the same story to tell you! You sold out stock A and he did the same with stock B. In the olden days, we used to cry on the other guy’s shoulder and after a while move out to have a chai at either Lalit or Dwarka (old-timers would know what I am talking about). Nowadays, you have no shoulder to cry. You probably kicked the furniture.

The sucker punch. It gets delivered every time. Never misses.

Like I said at the start, it never stops repeating, this sequence of events. Do we learn? No. Why? Because we are all creatures of emotion. When panic hits, all logic flies out of the window. And if there is one thing that is common and repetitive in the market, it is periodic panics. Everyone knows that some patience would probably do the trick, but who remembers that when the trade is going against you? ‘Get me out of here’ is the only song playing in your mind.

And so the market played out that reaction movie once again. Friday came and we did an about-face of 400 points intraday. So, the question is, are we done? Perhaps.

We did hit down to close the gap left way back on budget day.

It was so perfect as to be right out of the text book! The fall was also to 62% retracement of the rise from the Jan. 21 low. So Mr. Fibonacci was also at work. Now, why he didn’t go to work earlier is a valid question. Obviously, the sellers were a bit much for him to take on. At 62%, I guess the situation was better. So he decided to step in.

Market Technicals: After The Sucker Punch, A Ray Of Hope For Traders?

The reversal from there was pretty good too. But remember that every reversal is only as good as the follow-through that it can produce. So Monday’s trading certainly holds the key. The fact that Bank Nifty also did likewise (fill the gap and fall to 62%), while the mid-cap and small-cap indices too saw a drop to 50% retracement and formed a nice lower shadow (hammer-like) pattern to kind of seal the deal for the bulls.

Chances are that an entirely different set of people came in and bought this low. Those that are holding from earlier or who were badly injured in the fall would not be able to buy even though they could see that prices were reversing. It is just one of those things in the market, the way most of us think.

New people, bereft of the baggage of the earlier holders, will be able to carry the trade if the market gives them a reason to. This will be the big change that may happen in the coming week.

One, the new buyers have got the goods at a relatively better rate. Two, they don’t have older baggage. As soon as the willingness to hold the trade increases, the market may become less choppy. That will create a better sentiment for day players. This will lead to better volumes, which can then create a less volatile market trend. This is how a virtual cycle builds.

Of course, everything depends on the reversal of Friday succeeding and pushing the market higher still on Monday. Everyone abhors a missed chance to buy the low. So there would be many to buy on dips and hence Monday intraday dips will meet with some demand. The only caveat here is that we have some major global-led blip hitting us. Barring that, the scenario I have painted should play out, hopefully.

In the meanwhile, the U.S. 10-year yield goes about its merry way. And that is one genie that is still out of its bottle. The momentum has begun to slacken, so maybe it would be a bit more subdued in the week ahead. That ought to allow matters to come towards normalcy.

Else, everything was going all over the place: crude down, Dow up, gold down, Bitcoin up, dollar undecided, and traders all over the world were roiled.
Market Technicals: After The Sucker Punch, A Ray Of Hope For Traders?

But for traders, there are still some exchange-related problems that do not brook a ready solution. This is about the increased margins from March and I believe that it is one of the root causes for the heightened volatility that we have been witnessing. Because of the increased margining, brokers are not able to allow the same kind of leeway for traders which are forcing the latter to curtail or exit positions faster.

The enforcement of daily limits demands that positions have to be cut or adjusted somewhat earlier to the close so the ending phase is increasingly turning chaotic.

Given this background, the bulge players have also receded some and that takes away the cushion from below or the sustenance above of the trends. Markets in the hands of retail seldom trends because they just don’t have the power to move markets. Mix in inconsistent global feeds and you have those nasty opening gaps that we discussed last week. This does not brook immediate solutions and it may take a while before the market men work out the solution for themselves. Until then some trading difficulties are likely to persist.

Two other areas that are eating up capital: IPOs from retail and block deals from institutions. This is set to continue because the IPO calendar is only filling up further with every passing week. Could that be some sign of a top, as many people ask? I think it is too premature to say that. Tops are made on mania of some kind not increased interest. Q4 results flow is not expected to start for another month. So until then, we shall have to make do with global events. Not the best of inputs for steady trends.

So, what should we expect in the week ahead? Some Ichimoku stuff to help us with that. Note on the chart that prices have tapped down into the support provided by the cloud. The Ts and Ks line up traveling around 14,950 levels. Now we have seen that area being a good churn point in the past and therefore a resistance on the way back. From there to 15,050 should be the extent of a normal rally. An extended rally could perhaps take you till 15,100-15,200. This is marked on the chart given here.

Market Technicals: After The Sucker Punch, A Ray Of Hope For Traders?

Can it not go lower? Of course, it can. But I am not betting for it as there are enough signs that it may not.

So, until the next sucker punch, we should be able to eke out some better trades and probably get to rectify some of those losses that have got racked up.

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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