In search of Support level

 The bearish Head and Shoulders pattern in Nifty is now widely known. According to this pattern, the target of 23,100 is not too far away. The question is: will the decline end at 23,100? 

Once the pattern's target is achieved, there is no theory that suggests prices will reverse and start an uptrend from there. After reaching 23,100, the relevance of this pattern ends. However, the background distribution leading to the pattern's formation will still be significant.

Let’s see if any other key technical evidence is emerging. But first, we need to review some recent developments. On Wednesday, November 13, 2024, Nifty closed 325 points lower amidst strong selling pressure throughout the day. Interestingly, while FIIs sold shares worth ₹2,502 crores, DIIs bought shares worth ₹6,145 crores. The market's fall does not align with fund flow data.

The likely explanation is margin selling. When investors buy shares worth ₹5 lakhs by depositing ₹1 lakh with brokers, significant price drops in these shares can trigger margin calls. If the account’s equity value falls below the required margin, the broker’s RMS (Risk Management Section) will sell the shares in the market. This happens regularly in the derivatives segment, but in the cash market, such events often lead to severe declines.

This implies that some shares transferred from strong to weak hands during the distribution phase have now been sold. Often, after margin selling, we see short-covering rallies or a dead cat bounce. 

In the medium term, a trend reversal has occurred, and the market is heading downward. Interestingly, this decline is less influenced by bears and more by bull liquidation. This is further evidenced by analyzing India VIX behavior.

While FIIs and FPIs are selling heavily, and the rupee is at its lowest value against the dollar, the strengthening of the dollar due to Donald Trump’s victory is one reason. Still, dollar outflow also needs consideration. When FIIs/FPIs sell shares and take dollars out, the impact can persist for a long time.

The notion of reallocating investments from India to China has been heard, but comparing the charts of Nifty, Hang Seng, and SSE Composite Index does not strongly support this hypothesis. Another potential reason for the market's decline could be SEBI’s restrictions on the derivatives market. While the correctness of such measures can be debated, imposing restrictions contradicts the principles of a free economy, especially in the stock market, which symbolizes it. 

Such restrictions might send negative signals to foreign investors. The regulatory mindset, more than decisions like limiting weekly options or increasing contract sizes, can impact foreign investment decisions.

Among the few companies delivering better-than-expected quarterly results, HDFC Bank stands out. Despite being a heavyweight in Nifty and Bank Nifty, this stock saw significant selling pressure on Tuesday and Wednesday. This could worry bulls, as the decline in this investment-grade stock weakens Bank Nifty’s tendency to outperform and brings it closer to the Head and Shoulders neckline. If the 50,000–50,200 neckline is broken, the next station is 49,650, followed by a significant downside.

In bullish markets, deep chart analysis often seems unnecessary as optimism prevails. However, revisiting the weekly chart after a long time reveals an interesting channel—Nifty’s movement over the past year has been within two parallel trendlines. A break below 23,170 will derail this channel. Interestingly, this aligns with the Head and Shoulders target, making the 23,000–23,200 level a crucial confluence zone. On the upside, breaking 24,000–24,100 could bring relief, while breaching 24,500–24,600 is a distant dream. For now, bulls are in a slumber, dreaming of better days.

Notice the vertical axis in the accompanying chart. A 1,000-point rise in Nifty from 10,000 to 11,000 (10%) is not equivalent to a 1,000-point rise from 20,000 to 21,000 (5%). This difference has been accounted for in the chart.

Another point: Nifty’s 200 DMA is at 23,550, and its 200 EMA is at 23,470. Nifty is currently in a strong support zone. Additionally, on the daily chart, the RSI is in the oversold zone with positive divergence. Based on these factors, a pullback can be expected next week.

However, let’s not forget the earlier observation about bulls running low on ammunition. In the short to medium term, the trend is downward, and resistance levels are more effective than support levels—a fundamental principle of technical analysis.

#tradewiselylearncontinuously

Nifty: Weekly View 11.11.2024

 

The weekly chart of Nifty shows that this week had a marginally higher top, a lower bottom, and a lower closing for the week ended on 08.11.24 . After opening on Monday, Nifty endured a lot of volatility throughout the week and closed at the same level on Friday – 24,110, forming a Doji. Last week, Nifty also formed a Doji.

 

Therefore, while the day-to-day scenario looks challenging for Nifty, in the bigger picture, there's some comfort for the bulls. Technical indicators last month suggested that the market would go further down, targeting 23,100. I discussed this in detail in the post on October 20 and earlier on September 20, where I mentioned the potential for a significant drop. Both posts are available in my Face Book timeline (https://www.facebook.com/dhiman.das.94).

 

After the first week of trading in November, while the main theme still seems bearish, there’s also a possibility that a temporary bottom may be forming.

 

Last week, Nifty’s movement was much like a thriller movie. After dropping 250 points on Monday, it showed a remarkable recovery on Tuesday, reaching a low of 23,842. Bulls continued to dominate on Wednesday, momentarily crossing the important 24,500 level, but it was a false breakout. Noticing the intraday volume, one could have shorted instead of getting caught in that bull trap.

 

Even if one did short, it was reasonable to cover the position that very day. By Wednesday’s close, the strategy was clear – if Nifty crosses 24,500 again, a long position should be taken.

 

On Thursday, the market opened with intense selling pressure. It felt like a scene from a tragic movie, with the famous song by Jatileshwar Mukhopadhyay playing in the background, "What kind of morning is this, darker than the night."

 

The reason behind Wednesday’s rally was the outcome of the US elections. Now, experts are saying – our market didn’t fall due to the US elections, so it won’t rise just because Donald Trump became the US President. It’s a logical point, but I admit I didn’t think this way initially, which is why Thursday’s heavy selling pressure caught me off guard.

 

The only consolation was that, although I couldn’t capitalize on the fall, I didn’t buy and incur losses either.

 

Now, let’s discuss the technical evidence for why there might be a temporary bottom. In the hourly chart, we can see a bullish head and shoulders pattern forming. The breakout level is 24,500. In the coming days, it will be good for the bulls if 24,000 holds.

 

On the daily chart, momentum indicators, especially RSI, show positive divergence. I mentioned earlier that Doji formations have appeared for two consecutive weeks.

 

A Doji indicates indecision in Nifty – suggesting some hope for the bulls. Previously, Nifty was on a downward trend, and now it has paused temporarily.

 

The ammunition is still damp – although the bulls occasionally spark, there’s no real action. This reminds me of a story from around 80 or 100 years ago, about a soldier in charge of bombarding the enemy from a mountain. One night, the enemy advanced due to a lack of bombardment.

 

The soldier faced a court-martial, and when the committee asked why he hadn’t fired, he replied he had a hundred reasons, with the first being that the ammunition was wet due to rain. The committee head responded, "There's no need to hear the other reasons; the wet ammunition is enough."

 

There are many reasons Nifty hasn’t risen; the main one is whether Nifty will decisively cross 24,500. That’s not possible until the ammunition dries. Similarly, in Bank Nifty, the bulls will be ready to fire if it solidly crosses 52,600.

Always plan your exit in advance

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We are aware of the fate of Abhimanyu in the Mahabharata. During the time when Arjuna and Subhadra's son Abhimanyu was in his mother’s womb, he began learning warfare. While Arjuna was explaining the techniques for entering and exiting the Chakravyuha, Subhadra fell asleep, so Abhimanyu learned how to enter the Chakravyuha but was unable to learn the exit strategy. He had to pay for that ignorance with his life later on.

It's unclear why he couldn't learn this knowledge from his father after birth. Those who delve deeply into the study of the Mahabharata may shed light on this issue.

In trading, this problem of exit is a major reason for our losses. Our trade entries are often correct, but exits do not happen properly, even though "Exit is much more important than entry" is a well-known saying in trading.

In many mid-cap and almost all small-cap stocks, after a steep rally, there is often distribution, leading to several months of no movement. If one fails to exit such stocks in time, they suffer. In these situations, buying at high prices while chasing momentum and averaging down when prices fall leads to uncertainty about when to exit. Here, not only is exit crucial, but entry timing is also questionable. If prices don't recover after averaging down, one might think, "The price will eventually rise," leading to stagnation. The issue is that capital gets tied up in losing trades, causing missed opportunities in profitable trades. Selecting the right stocks for trading is not particularly difficult, but it is essential; mastering this can help mitigate these issues.

Option buyers face the most significant challenges during trade exits. Due to the lure of "Limited loss, unlimited profit," if a trade goes against them, they often end up losing the entire amount.

There are two types of exits in trading: one is exiting at a loss, and the other is exiting at a profit. The latter is quite challenging to manage. In fact, losses can be categorized into small losses and large losses, while profits can also be classified into small profits and large profits. This topic warrants detailed discussion.

Remember, successful trading is a journey, not a destination. In the early stages of trading life in the stock market, one has to deal with small profits and large losses. As a result, capital can quickly deplete within a few days.

Those who wish to take trading seriously start to think about managing trades afterward. This is the first step in the journey to becoming a successful trader. It goes without saying that prior to this, one learns market analysis methods.

Now, it's time to focus on reducing losses. Regardless of whether the trade is right or wrong, one must cultivate the mindset of taking small losses and absolutely avoiding large losses.

Those who reach this stage have made significant progress toward becoming professional traders. They have moved past small profits and large losses to the next stage of small profits and small losses.

Now comes the final step in trade management: achieving small losses with large profits. Exiting trades with small losses is challenging but can be mastered. Many traders are skilled in this area, and it can be achieved at earlier stages.

While stop-loss orders can reduce losses, often only a fraction of the potential profit is actually realized. Maximizing profit is one of the toughest challenges in trading. Only a small number of traders can do this, and they are the true professional traders.

To increase profits, trailing stops are essential; changing stop-loss levels a couple of times can help secure profits. The 1:3 risk-reward ratio can be effective in some cases, but blindly following it can lead to issues. It’s undesirable for profits to turn into losses while aiming for a 3R profit. However, if one cannot accept the possibility of small profits leading to small losses, achieving larger profits becomes impossible. It's worth noting that while the definition of "more" profit varies among individuals, the amount of small losses should ideally be kept within 2-3 percent of capital.

To achieve substantial profits, significant market changes are necessary. Such opportunities arise only about four to five times a year. To anticipate substantial rises or falls, one must learn technical analysis thoroughly. Many traders possess that expertise; what is needed is trade planning.

In conclusion, if there is no robust trade exit strategy, one can refer to the accompanying image for a better understanding of the potential consequences.

#tradewiselylearncontinuously

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