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Market Technicals: Waiting For Godot... Er, Reaction!

Everyone is waiting for a market pullback but when one shows up, no one is anywhere to be found, writes CK Narayan.

A trader points to a monitor displaying a  chart. (Photographer: Michael Nagle/Bloomberg)
A trader points to a monitor displaying a chart. (Photographer: Michael Nagle/Bloomberg)

Hey, this is now getting to be boring isn't it? Another week, another new high. Yawn. What’s going on, guys? Doesn’t anyone want a reaction anymore? Or maybe, everyone has more or less given up on that? Not unlikely, as people have been waiting since April for a reaction, and each dip was thought to be ‘the one’, as though a reaction was like Neo from The Matrix, coming to solve everyone’s problems!

This reaction thing is actually quite curious, you know. Everyone is waiting for one but as and when a pullback shows up, no one is anywhere to be found! For, the dominant fear is, what if it fell some more? That holds everyone back. And before they know it, the market is back on the rise and they rue the missed chance, vowing not to miss the next one. The problem is, by the time the next one comes, the market or the stock price is another 10% higher and the fear props up once again when the next one comes along. Same behaviour - market down, fear chips in, buying is delayed, the market reverses, and the oops feeling sinks in once more!

Chart: Tradingview
Chart: Tradingview

I am sure many of you are familiar with the situation I described. So, the important question is, are you still among the set that is waiting for a reaction and believing (absolutely falsely) that you will buy. Really? You couldn’t bring yourself to buy in the correction back in September (10,800 low on the Nifty) and then again in end-October (11,514 low) and then once more on that one day smash on Nov. 25 (12,844 low). It was either a case of ‘it’s all over now’ or ‘let it fall some more’ or ‘OMG, bearish engulfing pattern at the top’ but the end result was the same, you did not buy.

So my question is, why on earth do you believe that the next correction should be bought into? Has everyone suddenly become wiser? Realised their mistakes? Turned a new leaf?

The Americans have a rather impolite phrase as an answer for these questions which roughly translates in Hindi into a more polite, colloquial as ‘Chal, chal, hawa aane de’.

So why beat ourselves up with an expectation of a reaction into which we are, most certainly, not going to buy? Instead, would it not have been marvellous if we had simply followed the trend? But we will not. There is simply something ingrained within the human psyche that wants to know when disaster is going to strike! This is probably why most of us are forward-looking and waiting for a crash.

Eventually, however, people do turn a bit of a leaf. That is when, at the top, we start getting justifications for why this is a new bull market, why there will not be a crash, even why Covid-19 was such a great thing and we didn’t realise it at all! I think a couple of those have started surfacing. I saw one video and read one report by a renowned house stating – with lots of ifs and buts, sure, but stating nevertheless – that maybe we should not be looking at reactions anymore and perhaps just dive into our favourites and somehow or the other the valuations will kind of sort themselves out!

Well. Well.

When does this start coming? Right on cue as the venerated Fibonacci makes its appearance. Take a look at the next chart. Look at the confluence.

Market Technicals: Waiting For Godot... Er, Reaction!

Not one but three projection of former swings, all dovetailing into the current prices! If sceptics among you feel that isn’t enough, then there are two price extensions of contra swings that also come into the same levels! That ought to be something good enough for most, I would think.

So, could we be looking at the top here? The answer is, I don’t know.

Didn’t expect that one did you?

But it is a fact. On the charts, we can, but, lay various hindrances to the pathway of the prices. It is for the prices to say whether those shall be respected or not. If they do, then we can take the next steps for a pullback. If they don’t and just push through this OMG-inducing confluence, then we just discard it and go on to the next one. That’s it. The line to remember here is from that old high school poem The charge of the light brigade (Lord Tennyson, I believe): “Ours not to reason why….ours but to do and die”. If we had done that for a long time from, say, from the 10,000 low, we would all end up ‘dying’ a lot higher, meaning that we would exit considerably higher than where we entered! Instead, we used this fanciful imagination of ours to construct stories that never existed!

What can confirm or deny what can possibly happen ahead? Well, we have our other technical indicators to light the pathway ahead. The next chart shows a simple trailing stop, using my specialised Stop Trail line and the RSI oscillator.

Market Technicals: Waiting For Godot... Er, Reaction!

You can notice that the StopTrail line has been troubled – that too very briefly – twice in the past nine months (marked) and as of now, the index is continuing to coast comfortably. On the lower panel note that the RSI is placed above the overbought level and designer, Welles Wilder, told us to always wait for the indicator to go below the overbought zone before counting the chickens for a reaction. There is a Class-2 type divergence present too.

Now, if both these triggers are pulled i.e. the StopTrail line gets cut (currently at 13,245) and the RSI exits the overbought zone, then we would have reason to believe that the odds for a pullback ahead shall increase greatly.

Until then, we wait. And continue with the longs.

And that is the end of the story for this week, folks.

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.