Nifty This Week: Technical Charts And More – Time To Lighten Positions A Bit

It is the seasoned trader who is facing difficulty these days in keeping up with the market. His experience is coming in the way of profiting. For people who have been around, these levels of the market, the lack of meaningful reactions, the high valuations of stocks, etc. are all red flags that either prevent the person from taking positions or abandon the same at the very first sign of trouble. For the newcomers, there is no such problem as they carry no baggage. They entered the market when it turned bullish in early 2020 and have since enjoyed a very good trend to date. So they have been comfortable buying the dips and throwing more money at the market every now and then..But in the process, I don’t believe they have learned the right set of lessons. In bull phases the market is kind. Everything seems easy. But it is also a fact that easy has a cost. Most active players today have not had to master any craft. Mastering your craft is hard but having no skills is harder. That aspect is put to test only when tougher times come. This is a lesson that is learned the hard way in the markets – after many losses are taken. When money making is easy, everyone thinks he can do it. So they just continue with what they are doing, believing that it will continue to work. But we all know it will not. The question therefore is, if a change comes, are we ready to spot it and change ourselves?.Prolonged Consolidation For Nifty.It has now been about 18 months since the run started. Each high since March 2020 has been significantly higher than the previous one. The lows during the correction were small affairs and came nowhere to overlapping the previous highs..In the current rise, the new high is hardly above the previous high. Any correction now can easily overlap the previous swing high of February 2021. If that does happen, then it will be the first of the signals from the market that it has different intentions..I say this because of the sustained six-week consolidation that has been going on. Earlier corrections or consolidations have been about 3-4 weeks in length. Only the February-April correction was slightly longer, at about 7 weeks..Volumes in the Nifty Futures have been dropping steadily, as seen in the chart below. The Bank Nifty has not been too different either, in fact, a bit worse..With the sentiment being rather upbeat, everything, kind of, looks upbeat too. But if one looks at the lay of the land, as it were, matters are appearing different. While the focus remains on the new Nifty highs and talks of 16,000-plus and all that, there has been some really aggressive action in the small and midcaps. The next chart shows the relative performance between the Nifty 50, Midcap 150, and Smallcap 250 indices..Note that from around November, the midcap and small-cap indices have totally outrun the Nifty 50 in terms of gains. The Smallcap Index has done 191% compared to 150% for the Midcap 150 and a meagre 95% for the Nifty, So now we know where the money has been going and why the larger market—making up most of the F&O universe—where trading happens, has been such a difficult place to inhabit recently. Short- to medium-term investing has been awarded handsomely and old portfolio holders have seen their holdings compound rapidly..Signs Of Froth?.Can we detect some froth building? Perhaps. A recent study by Paytm says that IPO applicants are getting younger all the time: the average age of an applicant, it appears, has dropped from around 30-32 to around 23-25 now. IPO returns have been healthy as listing gains have been seen in many. The grey market is active and now a big spate of IPOs is planned across the next couple of months. Issues are becoming larger in size, sucking in more money than ever before. NBFCs are raising funds to cater to this IPO funding market and are seen doing brisk business. That has, traditionally, been froth..Quarterly results have surprised the street over the last two quarters. The market has been happy to respond positively. But the fear has now receded and it is more than likely that for Q1 results that have started rolling, expectations are now built up. One of the notable things that have happened during Covid times is that companies across the board have all gone in for debt reduction. Will that provide the trick for this quarter’s results? With the index where it is and the levels of investments that have gone in from the retail section, there doesn’t seem too much room for disappointments this time. The last two times, people have been charitable but I doubt if they will be so generous this time..Scenarios For The Month And The Quarter.Looking ahead into the quarter and making a scenario for the same, I find that July may probably turn out to be the best month for the quarter, meaning that August and September may actually see some declines. We are trading near the highs now and half of July is already over. My quarterly map is not suggesting being gung ho anymore. Happy to be proved wrong of course but warned all the same..The July range is already about 330 points. June was about 465 points. The last quarterly range was also a large one. Reversal to mean is expected sooner or later. If one assumes that July will be a normal month in terms of price range then we can see another 150 points being added, giving a high of around 16,150 or so. If it is an extended run in the month, then add perhaps another 100 points or so to get 16,250 as a possible target. With the current momentum that may happen quickly..Using time cycles, the monthly high is slated around July 20, which is early next week. So, if we see an acceleration next week, it might actually be some kind of topping action..Given all these elements, I am suggesting lightening of commitments, especially in the small and midcaps where good profits have accrued. Time may also be at hand for hedging existing longs in futures if one leans that way. Forewarned is forearmed, as they say. Charts are currently telling me to prepare some defensive lines even as one continues to follow the trend. I was happy to give this market a lot of room to breathe over the last several months and have been happily rewarded for it. It is time, I think, to tighten the ropes some, lighten positions and watch the nest closely..If one is proved wrong, there will always be time and opportunity to get back in..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.

Nifty This Week: Technical Charts And More – Time To Lighten Positions A Bit

July may turn out to be the best month for the quarter, meaning that Aug. and Sept. may actually see declines, writes CK Narayan.

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