Market Technicals: Yet Another (Yawn...) Buying Opportunity?
An employee drinks tea as he looks at a computer monitor at a brokerage firm in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Market Technicals: Yet Another (Yawn...) Buying Opportunity?

BloombergQuintOpinion

Last week we felt we dodged the bullet as prices moved higher but that bullet was a bit Tomahawk-like, in that it followed us like a guided missile does and hit when we were all just about getting complacent with the new highs reached. Monday and Tuesday proved to be decent outings in the market as we punched up new highs for the rise, punching out 15,430 on the board, and then we slid. That slide persisted through the week and now we chalk up 4 red candles for this week. In the process, we also slid below the nearest gap zone left by the Nifty on the way up and that is perhaps happening for the second time after the last round in end-January.

Are we then going in for a repeat? That may be too hasty a call as we find that the prices have now drifted down to the level of the median line of the pitchfork using the most recent pivots. Pertinent to note here that the prices also reached the top end of the pitchfork- something that had been mentioned two weeks ago. See chart.

Market Technicals: Yet Another (Yawn...) Buying Opportunity?

Now the question is which of the pitchfork lines are going to dominate? The top had RSI divergence and therefore the high print is to be given weightage. The median line is work-in-progress as the next week's price action only can validate it as a support. Hence it is a halt only for now. In the earlier week's article, I had outlined the series of supports that are presented by different time frame charts. If the median line level around 14,950 is unable to hold the prices then we are staring at the next gap down zone – which is at 14,400-14,500 area. Now, that could be a nasty piece of work for day-traders and their ilk. I say that because very few are prepared for that sort of decline in the market. Most are in a state of complacence as far as the sentiment is concerned. One of the foreign brokers had an interesting report last week stating that the one big reason for a possible halt to the advance and a reaction is that there is no apparent reason. That is stating the same thing as complacence. Tops are formed when the sky is the bluest.

An interesting aspect this time is the quick break of the last swing low before the highest high. This breaks any short-term support trendline that one can draw and also changes the swing to down in the short-term charts. So the bears are not as badly off as the last time. In addition, if we raise perspective to the weekly chart, then we find the week’s trading to be forming a bullish engulfing pattern. The argument against this reversal pattern is that the prior week was a very small body candle and hence easily ‘engulfed’ so the same implications may not be present. So, the more reliable slip-inducing point would be the value zone formed around 14,000 (see chart).

Market Technicals: Yet Another (Yawn...) Buying Opportunity?

The fly-in-the-ointment here is the RSI reading – sitting comfortably in the overbought region (albeit with a divergence). So these are all warning alerts only in the higher time frame charts and not actual trade signals.

One must learn to differentiate between alerts and signals. On charts, we get many alerts but a few signals. If we mistake alerts for signals, we often come to grief. We remain ready for action on alerts but act only on signals. Early next week, if prices start trading below the median line levels, then one of the alerts (of reaching supports) stands negated and gets converted into a bearish signal for the near-term. Then forecasts for lower levels mentioned come into play. If no break, then no action. If one is following the weekly charts, then the signal status is still quite a distance away in both price and time axes- unless prices crack big time early next week. Barring that less-likely possibility, it continues to appear that any pullback may still be a buying opportunity only.

It is nice to write that one should buy on a decline – everyone says so and writes so too. But it is among the most difficult things to do. When prices are falling, the mind works in quite a different way, seeing a continued decline as the only possibility. Supports are seen more in hindsight than in real-time. It requires a high degree of conviction or some adherence to technically-designed structures on the chart to be able to buy at lower levels. Buying higher is far easier because the emotion of being left out is a bigger driver towards action compared to the fear of being wrong in the former! Every trader spends a lifetime getting this right and only a few finally master it.

The U.S. 10-year yields got on to a trend and that is pressuring the dollar and gold downward. The rise seems to be picking up momentum too so it seems set to continue some more. See chart.

Market Technicals: Yet Another (Yawn...) Buying Opportunity?

This seems like a retracement of the long decline since the October 2018 high. Seems to be headed for the 1.50-1.80 areas, basis the next set of retracements and former consolidation zones. This is important because it could trigger a halt or even a flight of FII money from other countries including India.

But if you look at the Emerging Market Index chart, that is still not showing any signs of worry as yet. Gold taking a knock shows that the money could have begun moving to bonds in the U.S. but equities remained steady and no profit=booking was visible in the S&P. Hence currently it is one of the alerts we just need to have on our radar. FIIs continued to be buyers in India last week too. In the F&O segment, they were sellers in both index and stock futures and buyers in index options. So, positioning there seems slightly cautionary.

Going into settlement week, we can continue to expect volatility to remain high, making trading life, as usual, a bit more difficult. Looking at options, the current Put base of 15,000 Strike should act as immediate support. Below this, VWAP levels of the series near 14,750 will probably be the next. On the higher side, I would look at 15,300-15,350 levels, which have gained significant call short OI in the last few sessions, to act as resistance. With earnings season having more or less run out, the market will be vulnerable to global inputs, a little more than usual.

Sector indices show that the big guns from FMCG and pharma as well as IT remained quiet during the week even as others sped upward. The VIX has been quiet the whole week and so the market may not make big moves. This could see a situation where the three sectors mentioned above could show some short-covering action from traders and may remain active in the week ahead. So would train my eyes to be watchful over there for some piece of the action.

One of the biggest laggards of the market has been real estate. But looking at the charts it is evident that money has been returning to this space too. I believe this is one of the biggest sentiment arbiters among all sectors because simply everyone, repeat everyone, is interested in real estate. All have been nursing duds for the past nearly a decade. Recovery in stock prices would also be a signal that the real estate market itself is returning to some health. So this could be a good area to watch too. The long-term chart of real estate shows interesting prospects.

Market Technicals: Yet Another (Yawn...) Buying Opportunity?

So, a mixed week ahead of us. Profit-taking visible but no major weakness anywhere. Local triggers (results) run out so global triggers may start to dominate. Breadth is high positive and most sectors are gainers, showing positive sentiments continue. Declines therefore may be limited affairs.

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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