Technical Insights, February 2021

This year has started off on a very strong positive note for us at the CMT Association. We concluded a successful internship challenge from which 5 students from 4 top b-schools will be joining us as interns or on live projects.

Unsung hero (Volunteer in focus): Vishal Mehta, CMT

You will have heard the phrase, “I know a guy who knows a guy…”. Vishal is that guy. Having worked with major financial markets systems providers like Bloomberg, Refinitiv (Thomson Reuters), Spider Software, Reliable Software and more, he has engaged with financial market professional for over a decade and a half. He has build strong relationships and tremendous credibility over this time. Today, he is an independent trader, algorithm designer, and the founder of MarketScanner.in.

Vishal also serves as the co-chair of the India Chapter of the CMT Association. In this capacity, he works tirelessly to help our Association achieve our strategic objectives. Leveraging his network, he creates greater awareness across employer organisations about Technical Analysis. He engages not only with heads of business, but also HR departments like Recruitment and Learning & Development. He has also conducted free workshops for client advisors of large institutional and retail broking houses to help them use technical analysis in their workflow.

Vishal believes that his work as a volunteer on behalf of the CMT Association has helped him engage with Indian and global thought leaders. This has helped him mature as a trader, leader and person.

 

Celebrating a new CMT India author

Ashish Kyal, CMT has co-authored his first book with Prof Smita Roy Trivedi of NIBM, called “Effective Trading in Financial Markets using Technical Analysis.” With introductory notes from Robert Prechter, Ernest Chan, and SEBI’s G. Mahalingam among others, this book enjoys strong recommendations.

We are proud of Ashish for this great milestone in his career. Ashish is also an active volunteer leader, working with the team that engages with regulators to help them understand more about technical analysis and its value in the investment process. We are confident that these efforts will pave the way for greater recognition for technical analysts, and a deeper understanding of technical analysis across the Indian financial services industry.

Other highlights from the CMT Association:

1. The transition to Discord as our communication platform has been coming along smoothly. Hundreds of members are now able to engage with each other and stay up to date on the latest news of the CMT Association. Mohit Handa, CMT continues to lead this effort, and he is ably supported by Sagar Peswani, candidate volunteer. A Jobs board has been set up in the member’s area of the Discord channel.
2. The Technical Analysis Investment Challenge: This challenge is open only to candidates of the CMT Program and full-time students of our academic partner schools. Anuraag Saboo, CMT, co-founder of Gumption Labs and Trader’s Cockpit, is the volunteer chairperson of this challenge. This will be a 2-month long competition hosted on Trader’s Cockpit where participants will come up with investment ideas based on technical analysis. We will be sharing the progress of this challenge on social media as well as with key employers across India. This should help create career opportunities for the participants as well. The challenge will run from February to April.
3. The Client Advisor Workflow Workshop: This effort led by Vishal Mehta, CMT, helps retail broking houses train their client advisors to engage with their customers meaningfully through a few key technical analysis skills.
4. The Media engagement team has been working on building strong relationship with news houses to feature technical analysts. Stay tuned for some strong opportunities for CMT Charter holders.
5. The Participating Prep Provider Program: Due to be launched this month, will create a repository of contact details of organisations or individuals who provide prep courses for the CMT Program, and agree to adhere to our guidelines.

Please feel free to reach out to me if you would like to participate in any of these initiatives.

Have a great month ahead!

Joel

 

Charts: Bloomberg

The 0.25 x 3 High-Low basis Point and Figure chart is at an interesting juncture. Notice that not only are we at a long term trendline drawn off the 2019 lows, but the current column of Os has now reached a level where one of the prior columns bottomed out. At the same time, the 45-degree line of resistance has a good job of containing the dollar’s advances for now.

 

The monthly Ichimoku chart is also at an important juncture with the Kijun Sen (orange, 26 per High – Low midpoint) going horizontal. Notice how the market took support the last time the line went flat. It will be interesting to see if the Kijun offers support yet again with the candle ranges becoming smaller as the USD looks to find a footing

 

 

Looking at the daily candlestick chart, there is clear evidence of a falling wedge. Falling wedges in a falling market are very bullish when the upper wedge line breaks, which hasn’t happened yet. They often lead to very dramatic reversals, so the appearance of this pattern at a major long term support area is a message that can’t be ignored.

 

 

Finally, the Dollar Index (DXY). We are now within striking distance of breaking past two very significant down trendlines, not to mention the textbook Head and Shoulders reversal pattern that the market seems to be tracing. The area marked off with the horizontal neckline and dual trendline resistance will be key going forward. If the market breaks this area, expect fireworks and the INR situation will get even more interesting

 

 

USD/INR SPOT CHART, WEEKLY PRICE BARS:

If you are trading any of the Rupee based pairs of currency, especially USDINR, you will land into trouble if you use only the charts or Intermarket factors for your analysis. One needs to have a solid understanding about which side the RBI is playing and how determined they are about defending a particular level. RBI’s hand becomes powerful much more when Rupee is appreciating, than when it is depreciating, as it can theoretically buy unlimited amount of $. That is exactly what has been the case since USDINR began to drop, since mid of last year. One can observe that prices have held a particular level for some time and then broke down, as RBI allowed prices to fall. However, since September 2020, RBI has been holding the line very strongly under 73.00. They may have accumulated close to $60 billion via spot, forward and futures intervention. Therefore, central bank remains the chart maker in USDINR, and through that other Rupee pairs.

What do I see now?

Ans: The ongoing tussle between RBI and rest has smothered realized volatility to historic lows. Even the implied volatility has dropped to low levels, near 4% for ATM 1 month. At such low volatility, it is not prudent to indulge in short Vega strategies.

Primary trend remains intact and that is downward. Having said that, a clear and convincing break below 72.75 is needed for USD short sellers to make a decent buck. Target will be close to 72.00 but even then, you have to keep an eye on RBI’s action.

Nevertheless, in case of a clear break above 74.00, which will require a big risk-off phase in EM equities, USDINR can aim for 74.90/75.00, where once again $ sellers may enter.

 

EUR/USD SPOT CHART, DAILY PRICE BARS:

Euro is kind of the sick man of Europe. Lack of growth triggers and slow vaccination is weighing down heavily on the overstretched speculative long positions. US Dollar Index, which is widely quoted has weightage of Euro pretty close to 60%. Therefore, it is better to analyse the EURUSD chart, then US Dollar Index.

EURUSD is resting at a critical level near 1.1950. In case the price breaks down below 1.1950, it can aim for 1.1600, fulcrum of the 2020/21 up-move. Therefore, folks keep your eyes focused on EURUSD. A breakdown here can have wider implications for currencies across Developing Markets and Emerging Markets.

In this post, I will try to explain the concept of Relative strength with the help of some charts. Relative Strength is a study of the relationship of price between one trading instrument and another. We keep the index / benchmark as the “base” or denominator and the instrument we want to compare, is placed in the numerator. Yes, in simple words it’s nothing but ratio analysis.

Now, what is the edge in this study?

• It helps us track the underperformance in bear market and outperformance in bull market.
• We stay ahead of the curve as most of the times we get the desired signal before the traditional “breakouts” or “breakdowns”. It also gives us a good exit signal.
• It is of great help when you want to “ride the trend” instead of exiting based on traditional supports or resistances.
• As you are trading pairs, risk is low and you can generate higher alpha.

Now, let’s discuss with a few examples.

• Banknifty / Nifty50 ratio chart

Now in this chart, we will be analysing how Banknifty will perform as compared to the Nifty index. As you can see, the ratio shot up recently after breaking out of a flag pattern which means that Banknifty can outperform Nifty. It has also bounced from an important support level indicating that there is more space on the upside as bulls have entered broken out of a significant level.

• Nifty Infrastructure / Nifty50 ratio chart

Here, the infrastructure sector is poised for a breakout on the daily timeframe. If the recent high is broken, Infrastructure stocks could move out of the current sideways consolidation and join the rest of the market rally. Infrastructure sector is generally volatile and sharp moves are seen in the Mid and Small cap stocks of this sector. Good opportunities are available in this sector if found correctly!

• Nifty FMCG / Nifty50 ratio chart

I believe, you are now a little comfortable with the concept. Looking at the above chart, the FMCG / Nifty50 ratio chart has broken a very important support on the “monthly” timeframe. Now, this can be interpreted in a way such that the defensive stocks won’t perform and fund flows into aggressive stocks can increase. Risk appetite has gone up! Also, if you have FMCG stocks into your portfolio, it may be time to re-evaluate those stocks and consider sectors like Banking and Infrastructure as potential investment ideas as discussed above.

• Nifty Pharma / Nifty50 ratio chart

Congrats! Now you are a pro.  Now, let’s discuss the most talked about sector of the recent times.  Pharma sector has violated a very important support indicating that pharma stocks are no longer looking attractive as compared to other sectors’ stocks. Hence, it is time to take a hard look at current investments in Pharma.

• SILVER / GOLD ratio chart

For commodity guys, I believe Silver will continue to outperform Gold. The ratio of Silver/Gold has given a fresh breakout which indicates there is more room on the upside and the party has just begun.

To conclude, Relative Strength analysis can give a good edge in making an informed and sound decision. The study is not easy but practicing it will make you realise how beautifully it helps us to gauge the momentum in the right direction with minimum risk!

Market discounts everything- as a technical analyst this is the mantra we live by! This statement means that the price at which a security is quoted represents the hopes, fears, inside information, and everything else that can be known about a given ticker symbol. There is a lag in time between real economy and stock market, and I believe this is the reason why most of the investors or traders are wrong at turning points.

Now let’s try to justify this with the use of Technical Analysis. To do so we will examine some historical charts since Technical Analysis is a process of anticipating future probable price moment studying and observing historical data.

Case 1:-

Above is a daily chart of Nifty50 spot. It is the top formed in 2008 and we can see that there was a rising wedge pattern breakdown. This is a

bearish reversal pattern that usually unfolds at the end of a trend. The appearance of this pattern and the subsequent breakdown should have been evidence enough for an exit.

I’d like to share an anecdote here. A friend of mine, owning a small-scale industry, was a vendor to a large-scale reputable company. When the market crashed in 2008, he was of the opinion that it was a minor correction and was expecting a quick bounce-back. Assuming this was a short-term correction, he averaged his stocks and increased his exposure towards the market seeing as the economic impact of the fall was invisible on his business until then. But within 9 months Nifty reached 2252 from the top of 6357 and his industry started taking the hit of recession slowly, as the economy began to catch up with the charts and the averaging of stocks bore no fruit.

Now take a look at the chart above. This was indicating that maybe a bottom was in place. Nifty corrected by almost 61.8% of the total rise from the bottom of 2001 to the top of Jan 2008 and a double bottom or a W pattern was visible on the chart. This suggested a potential reversal in the market. But when the time was ripe, my friend was unable to take advantage of this potential reversal since his capital was locked in due to the earlier exploits of averaging.

We can see how the market discounts everything and there is a lag between the markets and real economy because of which a majority of retail investors are wrong at market turning points, just like my friend.

Case 2:-

Above is a chart in which a wedge was formed only this time, it was January 2020.  a similar pattern played out: everyone was bullish looking at December quarter results and the general complacency meant that the fall caught most people off guard. While the 2008 crash was attributed to the housing bubble in US, this time it was attributed to the global pandemic and economic lockdowns.

We all know lockdown was declared around last week of March 2020 while this fall started playing out in Jan 2020.

Case 1:

There was a lower top lower bottom that had formed on the weekly charts also suggesting sell according to Dow theory. Below is the chart.

Case 2:

Another chart below using simple moving averages was indicating a negative outlook where the short-term average crossed the long-term average from above.

Below are the charts that suggested buying in May/July 2020

1)Chart showing supports on monthly pitch fork.

2)Higher Top Higher Bottom suggesting buy.

3) 50% retracement of entire rise from 2008 bottom to the top of Jan 2020 suggesting potential buy.

All the above charts suggested a shift in sentiment indicating buy signals but very few investors bought into it as everyone was afraid due to lock down that was in place since March end 2020. Looking at the media reports, there were questions over the survival of the human race altogether.

While these examples are more obvious during major turning points, short-term trends unfold in the same manner, with the price discounting events, news, and sentiments before any fundamental change.

Nifty achieving long term target

Nifty monthly chart above shows that index has completed a 200% move when measured from its inception.

 

World Indices- At key Fibonacci extension level

Most of the world indices are approaching important Fibonacci extensions or projection level of the fall from Jan’20 – Mar’20. This suggests a pause in world indices before they head higher.

 

S&P 500 – Price reaching 138.2% extension	Taiwan- Price at 161.8% extension

Source: Bloomberg

 

Nikkei- Price achieves 161.8% extension level	KOSPI- Price close to achieving 161.8% extension

Source: Bloomberg

 

Seasonal trend – Jan- Mar topping cycle

Source: trading view

The above chart of Nifty since its inception shows that the index has entered the Jan-Mar topping cycle. The chart shows that there are 17 instances where significant tops or bottoms have been formed. It can be observed that in 12 instances, Nifty has formed minor or major tops in the first quarter and more specifically in January.

 

Nifty:- Drawdown analysis

Periods when nifty rallied 50% without 10% correction			Drawdown post rallying of more than 50%
From	To	Rally in %	From	To		Drawdown in %
Apr-03	Sep-03	55%	Dec-03	May-04		-35.86
Sep-03	Dec-03	56%	Jan-05	Feb-05		-10.65
Oct-05	May-06	63%	Jul-06	Jul-06		-10.2
Aug-07	Dec-07	58%	Nov-08	Mar-09		-21.64
Mar-09	Jun-09	84%	Oct-09	Nov-09		-32
Aug-13	Mar-15	77%	Sep-16	Dec-16		-31
May-20	Jan-21	67%	Jan-20			?
Average rally		66%				-23.6

Source: Edelweiss Wealth Research

 

 

We have analysed the data since ’99 and have collated instances where Nifty has seen a correction of 10%. The observation concludes with an outcome of how much does an index rally post a 10% drawdown and the follow up drawdown after the rise.

 

The outcomes suggests, on an average, Nifty has seen a rally of about 66% and post that Nifty has seen a correction of 20%. Currently, Nifty has seen a rally of about 67% post the drawdown of 10% in the month of Apr’20-May’20.

This suggests index has rallied to one end of the extreme and a correction or a pause is inevitable.

 

DOLLAR INDEX- Reaching multiple support zones.

Source Tradingview

It’s all about dollar!. A fall in dollar index has led to massive inflows in Indian market. Inflow has been so strong that India is the only country amongst emerging countries to see inflows to the tune of $21bn. The short term chart structure above suggests that dollar index is approaching crucial support levels around 88 – 87. From 2008 – 2011, there were a couple of instances where the same levels (88 – 87) were acting as stiff resistance levels. They were eventually broken in the second half of 2014 and early 2015. The same levels acted as a base when the Dollar index hit a bottom in 2018.

 

Technically, this type of formation is termed as “Change in Polarity”, wherein earlier resistance levels take up the role of Support levels.

 

A reversal in dollar index thus could pause an uptrend in Nifty.

 

Nifty:- The path ahead

From the above statistical data and analysis on monthly chart, the possibility of nifty taking a breather around 14450 looks certain.

 

In addition to the long term target being achieved, daily chart too suggests 14700 to be a crucial resistance for the price.

 

The channel projection shown below has completed its 161.8% projection level at 14700.

 

Thus the base case scenario suggests nifty should head for a correction which could retrace 23.6% of the rally or fall 20% from the top towards around 13000-12000 range.

 

Conclusion:-

As most of the indices has reached key Fibonacci level. I foresee a correction from hereon. Will correction will be a part of the bull market or will price undergo a deeper correction remains unanswered at the moment.