Nifty Weekly Forecast: The pathway for the index seems to be fairly set for the week ahead. A nice range has formed, which can be better seen using an intraday chart.
Starting with the gap down move of May 6, the Nifty has been moving in a range defined by 16,400 on the top and 15,750 at the bottom. The range top has been tested three times, as has the range bottom, making this a good, valid range or a rectangle.
I am not a big fan of rectangles (because any consolidation in the market can be captured between two lines, most of the time), but this one is a classical one and cannot be missed. Also, it makes forecasting easy. The width of the range is 650 so, upon a breakout, that is the extent the index may traverse. As a result, we get targets of 17,100 and 15,200. This should be just dandy for option strangle players.
Now, the all-important question is, which side shall be the breakout? As matters stand, it should be to the downside because consolidations following trends tend to continue the movement. Therefore, the situation that led us into this week ought to continue, making a sell-on-rally type of action the default choice.
So, now, the question is, do traders sell near the top of the consolidation (16,400) or wait to sell higher? The choice boils down to how aggressive one wants to be.
- Selling excursions to the top of the current range is taking a stance that the range will hold. Those who are active should take that play with a nearby stop.
- Those who play a little longer can take multiple positions with the first initiation near the top end and add more at higher levels.
The reason why we can attempt this approach is that there is a clear supply zone above and therefore even if prices breakout higher, they should meet up with supplies soon enough. But, this type of trading would necessarily be multi-day and would also require additional margins and a lot more nerve. Do you have this? Only then go ahead with it. Else, tight stops and quick turns would be the way to go.
Trading is all about choices. And choices are all about thinking and analysing the odds. The refusal by many traders to undertake this process is the reason for their grief. Just like a forest creates its own rainfall, traders also create their own profits and losses.
I generally like to look at the long-term to decide on the short-term, but in recent weeks there has been no change in the longer-term picture. To recall what I had stated earlier, prices are still in a corrective mode. The price damage has been limited to around 24% of the rise despite 7-8 months of correction now. It suggests that we may have a complex corrective pattern unfolding, and the present one is more time-oriented than price-oriented.
This prompts me to think that a price-damaging leg of decline is still in the balance. Hence all rallies, however large, should still be looked upon with suspicion.
Of course, we should look at every day with new eyes, meaning that we should be analysing data afresh every time, and not be a prisoner of the prior forecasts. However, so long as the main picture doesn’t change much, we can run the risk of running with the forecast until new evidence shows up.
What about investing? People have been steadily growing more frustrated with the non-performance—or indeed, sharp declines—of their portfolios. I was recently in conversation with someone who sold out his legacy portfolio (comprising mostly blue chips) because he was unable to handle the tension of losing value. His argument was that he was old and is better off with the non-volatility of fixed deposit returns, and he didn’t mind the lesser return because he has enough money anyway. That is not the story of most others in the market. That said, the note of frustration is common for all folks.
This is one part of investing that is never taught to you, the difficulty of sitting on a portfolio that is steadily losing value. Here is where most mistakes are made, at such times.
My suggestion is if you believe you have good stocks and are happy to hold them, then do so. If, however, your portfolio is made of picks from other people’s tips, then it is better to simply liquidate and go to cash.
You have no reasons for having bought them and will also have no reasons for either holding them or selling out. In such a case being out and in cash is better because that way you can at least get a second shot at it and hopefully, you will do a better job the second time.
Coming to trading, people continue to have difficulties in dealing with volatility. One of the ways that traders may try to solve this problem is to enforce more of their willpower in holding on to positions as prices keep swinging back and forth. That may work sometimes, but I would advise against it. As a wise man once put it, it is ‘better to decrease the friction outside [a machine] than to increase the power inside’ – meaning, it would be better to accept that there is a high amount of volatility right now as well as very high levels of uncertainty. Deploying willpower and trading methods in such an environment is not exactly going to help.
Under such circumstances, it is better to play a very limited game, trying to win with the smaller trends, if one can. The market isn’t going away anywhere. When normalcy returns, we can always get more aggressive. Right now, traders are taking a shellacking. Best to bunker down and wait for the right opportunities.
So, we wind up the commentary for the week with an expectation of continued downsides and even if there is a rally, it may meet with continued supplies at higher levels. Those that can short, can be active in the market. For the rest, including diehard bulls, it may be very, very selective action that would be required.
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