A look at the weekly chart, and you will feel very confident about what the market is doing. However, if you switch to the daily chart, then you will be filled with some misgivings. This is a strange situation—how can the market show two different signals at the same time, you might ask?
The weekly candle is a firm one, even for the Bank Nifty. Prudence tells us that we should be following the larger trend signals for the trend. By that token, we need to continue firmly on the bullish path. I have been advocating that for quite some time now (with a caveat now and then when the trend faltered a wee bit) and it has proved useful. I really see no reason to change that tack as of now.
But we do live and experience the market on a daily basis and the closer we are to the market action, the more influenced we shall be of the daily ebb and flow of news and price action. And there, it is evident that the mood is fickle. Chart 1 is the daily chart of the indices. The chart is annotated with a Supertrend indicator.
Keeping in line with the main trend, the Supertrend is in a bullish state in both the Nifty and Bank Nifty. This flip has occurred immediately after the trends changed from June 5. What is a niggling worry is that series of small body candles that the indices are showing as the levels keep going higher and higher. It was easy to make money in the immediate aftermath of the election debacle and we can see long-range candles, upside gaps, lower shadow candles. But over the past week or more, it has been a case of alternating days of ups and downs, and the intraday range has been quite limited too. In addition, gaps in the morning are not seeing a follow through. Thus, making money has become difficult. Sentiment takes a beating when money making becomes tough.
So, this is the dichotomy that I had spoken about at the start of this article. It is now prompting many to consider whether some distribution may be going on? At these levels, it is not surprising to find that there are enough takers for such thoughts. After all, everyone wants to protect the profits that they have made — and plenty of that has been indeed made. For many, this is an alien feeling, as they have not seen such consistent success since a long time in the markets. Therefore, willingness to hold through any fulmination, however slight, is very low and this was pronounced in the last week where news flow was somewhat fluctuant.
This is one of the reasons why I had advocated earlier taking a slightly longer view and waiting for pullbacks to enter. But as the index keeps ticking higher, the FOMO feeling becomes more acute and one gets dragged into breakout stocks at higher and higher levels. Alongside, they keep hearing and reading that valuations of stocks are unreasonable and that adds to the uncertainty even as the price action is too alluring!
Sector rotation has been rapid over recent times, as operators take advantage of this tentative sentiment among traders. Chart 2 shows the setup of four popular sectors (IT, automobile, metal, pharma) and we can note that trends are quite varied. They too are showing a tendency for some rotation through bull and bearish days. A slight defensive nature to the sentiment can be noticed from the fact that the IT and Pharma stocks (considered Defensives, traditionally) and this too betrays a cautious mindset.
So, the question is, what do we do in such markets? The answer remains similar to earlier letters. Maintain a bullish posture and exercise patience to wait for dips to buy into. It is not as though these pullbacks don't come. Chart 3 is intraday charts of IT and Metal indices showing frequent pullbacks. Even in IT where some trend is also seen recently. Patience to wait for it is the key.
I have shown this in index charts but realise that this is equally true for stocks as well. So, exercise the same patience there as well.
Another question in the minds of traders is: should we be buying at "such" levels at all? Fair enough. But just consider this. When the Nifty reached 21,000 from 20,000, did it not seem like being 'high'? Same at 22,000, 23,000 and now at 24,000! At every new level, it always looks like levels are 'too high'! Where do we draw the line, then?
Answer is, we don't draw the level higher! We draw them lower! This is a market to participate — not sit out in fear. Yes, there will be a turn somewhere down the line. My stance is, let it come when it is ready to come and let me not draw it, for, what right or authority do I have to draw that line. Instead, all I can do for sure is to decide how much am I ready to pay for finding out that I am not right in my bullish view. And that is my stop-loss line. I have been mentioning stops over the past many weeks and none of them have been hit so far. Then why worry? Continue with the same approach. Like the American cliché, 'don’t fix what ain't broken yet'.
I really don’t know how else to put it. Reliance Industries Ltd. makes a move higher on the back of the tariff rate hike, which will bring in the big moolah for Jio. But the bears among us quickly want to spread the rumour that Jio will come out with a large initial public offering. These are games that keep getting played out constantly. I mention this as an example to showcase the kind of news flow games that we all have to put up with almost day after day while in the markets. Unless we have a clear idea of how to deal with the market on an overall basis, it is more than likely that we will get swayed by Reliance bulls on one day and dismayed by the Reliance bears on the next!
Results are going to flow and IT will be first off the block. Attention is already flowing there and patterns are forming on the charts. Feeds from overseas in tech stocks seems to be positive too. Chart 4 shows the IT index with a pitchfork and it can be seen that the median line is to be crossed and the rise is with some good new momentum. Stocks have all rallied but going ahead, only stocks that beat market expectations on the results may continue higher. So, watch whether that median line breakout sustains ahead.
Consumer growth is strong and good results (especially on volumes) among companies from this space can flourish. Charts there are also well-placed. At the same time, sectors like defence PSUs, railways have all run tremendously and these can be quite sensitive to numbers not satisfying the marketplace.
The long and short of the above is that the results for Q1 cannot be taken for granted. Big moves have occurred, valuations have been stretched in certain areas and expectations have also got built. Now mix this in with the budget. Though not really relevant for the next week, there will be stocks that may move on rumours related to the budget. All of these present us with opportunities in the weeks ahead. We are into an important phase ahead as the outcome of the coming couple of weeks will have a bearing on the trends in the coming few months.
So, even as you are active in your trade, don't forget to be observant of everything that is happening around you for the coming week or two.
With that caveat, it is time to sign off for the week.
CK Narayan is an expert in technical analysis, the founder of Growth Avenues, Chartadvise, and NeoTrader, and the chief investment officer of Plus Delta Portfolios.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
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