Market Technicals: Shell Shocked, But Not For Long
Monitors indicating stock prices are reflected in a glass panel at a brokerage firm in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Market Technicals: Shell Shocked, But Not For Long


The cheering continued post-budget. A day after we broke some records for the budget day, the bulls were in a continued mood to create more new ones. A gap-up on Tuesday made it known that the bulls didn’t want to waste more time in punching higher. The following four sessions after the budget were higher high stories and the Nifty 50 powered its way to post a reading above 15K and had it not been a Friday (where, usually, retail tends to take profits home) the market may have well closed above the sentiment strengthening 15,000 levels. Still, I am sure no one is going to complain about the close near 14,950 levels! The Bank Nifty was not left behind either and it mimicked the Nifty moves with a full week advance to reach 36,640. Solid gains, therefore, for both the indices.

The last week’s view was that the prices had set off but needed a follow-through. All those were easily achieved for price, volume as well as momentum. So, now the threat held out by the end-January decline has been reversed decisively.

Market Technicals: Shell Shocked, But Not For Long

With the indices punching into all-time new highs, the pattern has been restored to being continued higher tops and bottoms. So for trend reversals, the market has to set up a down three-leg pattern once again. This will take time and hence one should buy the next dip too, whenever it shows up.

After the budget, there may not be too many bears left. However, there would still be many who have missed out on the rise and they shall continue to shout stuff like ‘Divergence’, ‘Overbought’ ‘Valuation’ etc, etc. hoping that someone would take notice. There was a great WhatsApp forward that I got last week. It said, ‘In case you are upset about your job, remember that there are still fundamental analysts out there trying to value this market’! Another classic from TV last week was that Rakesh J. trounced a few anchors stating, ‘Ho gaya na funda ka mental’! I am sure a lot of people saw that. Good for a chuckle, maybe, but a trifle harsh, perhaps? But it also underscored the main problem underlying this market. Then there was this other poor sod on Twitter who complained that people are getting excited on the way up. Instead, he says, they should actually become happy when good stocks start sliding strongly. According to me, this guy doesn’t have a clue of what momentum does to people and their emotions. I briefly touched on this in the last week too and here are some thoughts on the same.

People find it difficult to handle high momentum mainly because almost everyone is used to a placid state of affairs.

When markets begin to move very fast, most get disconcerted and are unable to act.

The fast pace is equated with reckless, dangerous, risky, trap, etc. - various adjectives suggesting that inaction would be a better option just now. Not doing anything is a much ‘safer’ option for most people. Responsibility can be easily shirked. What’s more, such a position can be easily explained to others.

I believe that this situation has hit post the budget. Like I had explained in the earlier week, the longs had already been shed ahead of the budget. Possibly some shorts had crept in too. Only the professional traders can pirouette on their feet swiftly. Others need more confirmation. So, in all probability, they would have waited a day to “see” what happens. Well, this is what happened!

Market Technicals: Shell Shocked, But Not For Long

So they waited one more day and then one more and finally one more. And the week ended. In the meanwhile, some crackling numbers came from large and mid-cap segment stocks. The FIIs rushed back in and began cranking it up once again. So, most people just watched without really ‘seeing’. If one had been looking closely, it would have been obvious from Tuesday morning that this was yet another runaway train and the only sensible thing to do was to board it. A good lesson here that looking is not the same as seeing!

Something a bit curious, though. Even post-budget, the DIIs were still on the selling side. That may have simply been a continuation of what they have been doing for a year. The chart here shows the net of FII/DII activity through the months.

Market Technicals: Shell Shocked, But Not For Long

One can note that the net activity was negative only in March-April 2020 and a bit in September 2020, these were negative because the FII also went negative in these months. This means the DIIs have been selling all through the last year and continuing.

What is curious here is that, to a man, the entire DII fund managers have been very positive about the budget. So, it begs the question what is making them continue with their selling?

My answer to that is simple. I believe they are still selling because the redemptions have not stopped. Next obvious question is, why have the redemptions not stopped? This has roots in the fact that the MF returns over the last couple of years have been poor and hence people have been happy to take money off the funds as the NAV edged higher. This is particularly in light of the trailing PE of the Nifty hitting never-seen-before levels of 41+. See chart.

Market Technicals: Shell Shocked, But Not For Long

This happened more because most people could not ascribe plausible ‘reasons’ to the rise except “liquidity”. Unfortunately, that is considered not good enough as a reason to hold on. Hence, a let’s-take-the-money-and-run kind of sentiment has been running all through this rise.

So is this set to continue? I believe not. Why?

Now people have a ‘reason’ – the budget just provided it. Even though 99% of the market players have no clue about the budget document or all the proposals, all of them can read the adjectives in the newspaper the next day. When uniformly the comments were positive (except for the opposition parties, who don’t matter anyway!) there may be a re-think.

If that rethink extends, the first thing that shall happen is to put redemption on hold. That ought to be enough. DII fund managers, held back from participating aggressively on the long side of this runaway market, will pounce on the opportunity and start buying. That may get the markets into a bit of a boil.

I expect that to happen ahead.

Can FIIs pull back, can money leave? That is another big fear that looms. I have no answer on that except to say that the key to something like that happening is in what happens to the almighty Dollar. It is beyond the capacity of most people (including me!) to fathom the myriad relationship the Dollar carries through multiple asset classes. I would prefer to follow the charts on that one. Currently, there is no clear-cut evidence of any trend in there. Hence I would believe that the world markets are simply moving in the ebb and flow of momentum and liquidity. So the short answer to the question is, Yes the FII may leave but then again, they may not! I simply don’t know.

So how do all these things tie in together about what can happen in the next week? Well here is my short-list of guesswork and expectations.

  1. Prices should continue to move up further as no one is prepared to chance his arm at these levels with big longs build up. Only the resourceful guys are buying in. These are strong hands, usually.
  2. Prices should continue to move higher as re-entry after the budget has not been possible for many as they were shell shocked by the pace of movement. Soon, they will all get used to the loftier levels reached, and hence FOMO will get them back in.
  3. Because of continued fear, positions are not being held and being quickly jettisoned on the first sign of trouble. This has been the feature since April last and may continue to be so, preventing the market from getting overbought. So no risk of big or sustained declines.
  4. Now that people have a reason to buy in, they will chase a whole lot of mid- and small-cap stocks and those ought to move higher. Good flow of Q3 numbers is throwing up a large bunch of new candidates. So activity is going to spread out further in the market.

Further targets higher can be made with measuring technics. For the coming week, I reckon 15,130-15,375 to be hit. Declines should now meet with supports around 14,400-14,640. Only a breach of the lower support zone will make me think differently.

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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