It was another poor week for bullish traders. Started weak and then continued lower to finish poorly too. Now, where have I heard that song before?
Oh yeah, we have been singing that tune for many months now—this is the eighth month to be exact. In between, very briefly, we got to hum a few bars of some bullish tune and some joined into a chorus on that, hoping that it would continue. But no, the market had no such intentions. It cut a rather resolute downward path through the week, as can be seen in the intraday chart of the week, where we see a clear lower-top and lower-bottom formation. Since this has been in progress for a while, the simple conclusion is that the decline continues and is just extending the downtrend since the April high.
The question that comes to mind is, has there been price damage? The answer is, no. So then, we are where we have been over the last many weeks. Now, we have gone through many aspects of the move since the high of October 2021, and people may be tempted to say, ‘tell me something that I don’t know already!’ Well, as far as the analysis goes, there isn’t anything new, really. But we all consider it either facetious or even blasphemous to say that we have no view on the market, as of now, even though that will be the truth. I have dealt with this in some detail in a blog post on forecasting, about a year ago. It is the kind of thing that we feel compelled to do, something that is called mimetic behavior.
After all, why do magazines, websites, commentators, experts’ et al, exist, if not to give everyone some forecasts? So, with that in mind, here goes some esoteric stuff for this week. In the second chart, I have drawn some price cycle lines and have marked them as grey and red dash lines.
If you notice carefully, the market moves are moving in a cycle created by the grey lines. The fall from April 5, 2022, started near this cycle line, fell to a low by April 19, then rallied back to the higher cycle line up to April 29, and then resumed the decline. The next leg dropped till it reached another grey cycle line by May 12. Here it churned between two such cycle lines until May 26 when it formed a reversal candle pattern and started out on a rally.
So far so good. The next rally should have proceeded to encounter another such cycle line and these were poised at around 16,400 and then above around 16,900. We had discussed in an earlier letter about this range formation breakout giving us a target higher near those levels. Now we find that the index failed to go to those levels and has instead stopped short of it.
Prices have dropped afresh from the rally high of June 3. Now we have a bit of a quandary. The well-laid-out repeating formation has suddenly slipped. Is the signal of not reaching the higher grey cycle line a sign of weakness? If this is so, can the index then revisit the lower cycle line near the 15,800-15,850 area from where the prices bounced last time? Or, does it suggest that the trend has changed from the May lows—which itself was a retest of the similar lows made back in March 2022? How can we know?
Well, using this price cycle analysis method, we can either do the black line cycle or we can do the red dashline cycle. The market will be captured within these for all time to come. If this has to be a shift, then the next fall should halt soon, as there is one such line – placed around 16,100-16,150—right beneath the current levels! After this, the prices have to rise to reach the next red dashed cycle line above the recent swing high, this will be around 17,200.
So, a bit of a crunch moment that is akin to two teams in a football match tied at 1-1 at half-time. If the prices break 16,100 then the former pattern will exert and send the index down for a retest of the May lows.
More declines to the next cycle line if those lows break. But we will deal with that later if it comes to pass. If, however, the prices hold 16,100 and then get past 16,650, then we can head out to 16,900 levels. Note that this will continue to keep the old cycle intact, yet. At this stage, we need to watch the market for a crossing of this important resistance, which will signal a continuation higher towards 17,200, for a new cycle.
Toh, picture abhi baaki hai, dost!
How should traders play these possible outcomes? What’s the point of making a forecast if one cannot find a way to play it? To some, it may seem like this is no forecast at all, with ifs and buts involved. People who feel that way are the ones who seek certainties from forecasts—an approach that is inherently flawed because anything related to the future can only be weighed as a probability.
Let’s jump to the hourly chart to see if we can get any read on what may lie ahead. This third chart shows the prices annotated with the relative strength index and directional movement index indicators.
The RSI chart shows two divergences, the first one at the top of the rally high on Jun 3, the second one being a Class 2 type divergence under formation as the prices wind down. It will get confirmed only if there is a reversal of prices higher next week. Failing to do this, will support a declining environment.
The DMI is showing a recapture of the trends by the bears as the negative directional index line has become dominant since June 3. The average directional index line is on an ascent so the bears seem somewhat in command right now.
This picture suggests more declines occurring in the week ahead rather than any reversal. Even if there is a rally, it would take a bit of an effort to wrest the advantage back from the bears.
Hence, fresh longs should be considered with great care. However, fresh shorts can be considered quickly in case of continued weakness. That is how I would play it.
Investing? I had already written a couple of weeks back that we need to give this a rest and be very choosy about where we put money in the market. The breadth situation has not improved. 60% of the stocks from the NSE 500 are in the red on a year-to-date basis. That share gets even larger if we look at the small-cap and midcap indices. So the advice would be to continue to keep away. SIPs are not covered by this view.
So, there you have it. When the normal stuff loses its edge, we move to esoteric analysis, to derive a view and then dovetail it into probabilities using standard indicators of the lower time frame charts. Couldn’t we have done it directly with the 60-minute chart, one might ask? Of course, one can but the higher perspective would be missing and that leaves us in the same spot, of having to do the analysis every day and perhaps more than once a day. Top-down works a lot better in technical analysis.
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