Market Technicals: Tweets, Trends, And Midcap Calling
Stock market movements on an electronic display. (Photographer: Paul Hanna/Bloomberg)

Market Technicals: Tweets, Trends, And Midcap Calling

BloombergQuintOpinion

Whenever there is something out of the ordinary, conspiracy theorists always spring up. Armed with pithy one-liners. The National Stock Exchange's systems were busted on Wednesday and immediately we heard quotes like, “boys play with stocks, men play with exchanges” and stuff like that! One never gets to know the full truth behind what goes on for real at the exchanges (that colocation thingy is still hanging out there, right? Meanwhile, it has been a decade perhaps…) but it does seem to me that matters could have been handled so much better. I know exchange defendants will say we don’t know any of the difficulties NSE faced. True. But there is something simple enough known as ‘communication’. The tweet from NSE came at around 12 p.m. whereas in reality the market system had been fizzling out much before and trades had shut 20 minutes prior.

Similarly, some active squaring up was going on, creating crazy ripples in stocks for about 45 minutes when the next helpful tweet came.

Not exactly the gold standard in communications, I would think. Not to speak of the tremendous losses that so many people incurred during those hours of incommunicado status.

Well, be that as it may, we will all move on, as we all always do. Just like the market itself, the people also have no time to linger over matters. We shall leave the NSE technology glitch to committees etc. and for a rap on the knuckles of those involved!

The week was marked by some great volatility. Monday began with a hit, but since that was a kind of culmination of a five-day drill down it was followed by a rally. A dull Tuesday was followed by a confusing Wednesday where the day-long closure dulled all senses until the market went into an extra 90 minutes.

Option shorts were taken completely to the cleaners in the one-way rally that even saw the Nifty 50 spike to a 15,524 freak-high for the day.

With the extended day finishing well, everyone thought that things were back to normal and turned complacent on Thursday, seeing off the monthly expiry without much fanfare. However, the world began sweating over rising yields and nervous entire global markets created major issues from the open for the Nifty. Taking the sock on the jaw, the Nifty went down for the second week in succession with an extended range.

In the last week, one of the hopes held out was that the bearish engulfing candle may have to be qualified a bit as the preceding week was a small body affair. At the end of this week, the Nifty left no one in any doubt about what the status was. See chart.

Market Technicals: Tweets, Trends, And Midcap Calling

Still, not too bad looking is what most may say, looking at the chart. After all, the bullish thrusting candle of end-January is yet to be compromised. Typically, when trends change, the last major buying point gets covered and closed beneath. That would of course be the words of those that are still fully-long this market. What about those that are not long or are looking for declines? They would be a confused set, probably. See the next chart with some points marked, and an explanation below.

Market Technicals: Tweets, Trends, And Midcap Calling

This is the daily chart of the Nifty with points 1 through 5 marked.

Sequentially, they are:

  • Point 1 is the pair of support trendlines coming from prior swing lows that continue to be comfortably placed. So no worries.

  • Point 2 is the first lower top and lower bottom formation since the new high we recorded recently. So first of the worries.

  • Point 3 is the RSI divergence that is very clearly visible at the last major high. By itself not so worrisome but became so when, at Point 4, the small rally near the highs displayed a range-shift pattern!

  • Point 5 finally is the range that the RSI needs to break to show that the bears mean business and have probably seized control, at least in the near term.

This leaves us with two possibilities. One, we resume the uptrend after hitting the supports – trendline, retracement, gap zone, etc. Two, we break lower based on other technical evidence – divergence, other patterns, etc.

The only way to answer that is when trading resumes next week. Sometimes you reach junctures in the market where the move possibly gets divided equally in probabilities. This is one such.

Another question that may emerge is whether the market, instead of trending up or down, can just eke out some consolidation-type action? Now, that is certainly a possibility. If the U.S. Treasury yield continues to spike or remains up, there is a possibility that the flow of money into our markets may slow. Then a chart like this one – the relative strength of mid-small caps versus large caps -throws up some possibilities. See the next chart, where I look at the Nifty MidSmall 400 Index versus the Nifty 100 ETF. Things appear to be interesting.

Market Technicals: Tweets, Trends, And Midcap Calling

I have divided this chart into three phases. Since the start of 2021, the MidSmall 400 has been out-performing the Nifty 100. This is Phase 1. Then in mid-February, it took a bit of a hit (Phase 2) but formed a nice inverted-head-and-shoulder pattern (rectangle). Now it is off to the races once again (Phase 3).

The pattern in Phase 2 clearly shows that the dip in the market before the budget and soon thereafter has been used to buy into midcap and smallcap stocks and that behaviour is still very much evident.

The good results for Q3FY21 have certainly helped matters and the Nifty punching new highs has kept the sentiment meter ticking.

I believe it is possible that the large caps may remain in a range for a while as the players shift to the midcap and smallcap stocks now as the main playground. Retail loves nothing more than to see those stocks flying because much of their portfolio is made of midcap and smallcap names. The active and aggressive participation of the retail investor is not yet seen because the rise has been led by large caps and the big and beefy midcap names. The MidSmall 400 Index itself seems rather well placed on the charts with respect to trendline supports, pitchforks, RSI, etc. (not shown in the above chart though).

So, yes, my vote is for consolidation to happen ahead and for the index to maintain a gradual upside bias even as volatile ranges rule. This is not to mean that there may not be further pullbacks. The gap zone, for example, extends until 14,350 and that is still a good 1.5% lower than where we have closed. And U.S. market uncertainties continue. But I don’t expect that the declines will have too many teeth to them. So as long as markets don’t tank, people are happy to participate actively in small and midcap stocks. All the three indices – Midcap 150, Smallcap 250, and MidSmall 400 – have hit new all-time new highs now. Time to shift focus towards those.

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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