Technical Insights, April 2021

This month saw small starts that promise the beginnings of great movements. The choppy markets took the participants of the Investment Challenge through an emotional rollercoaster, from which they emerged stronger and wiser, if our weekly conversations on Discord are any indication.

In order to make their learning experiences richer and to create content of lasting value for our members, two of our unsung heroes have been hard at work in their own unique ways.

Meet Raunaq Murarka, CMT

Raunaq works with Axis Securities as a Technical Research Analyst. He have been an active member from the beginning of my time at the CMT Association, when we set up the India Liaison office. In the past couple of years Raunaq has gone from strength to strength as a volunteer, contributing his time in the core volunteer team affectionately called the SWAT team, then taking ownership of our social media campaign content created for Employers. This month, Raunaq also took time out not only to record instructive short videos for the benefit of novice traders, but also appeared as a guest on our weekly sessions with top performers of the Investment Challenge.

Along with Raunaq, here’s Viraj Vyas, CMT

Viraj is a Technical and Derivatives Analyst at BOB Capital Markets. Over the past couple of months, Viraj as emerged as a strong volunteer leader.  He has taken ownership of creating content for our social media outreach to journalists and media houses. Viraj also joined Raunaq as a mentor to our Investment challengers to help them make sense of their experiences in the challenge.

Here are a couple of other important updates from the Association.

1. The CMT Association’s Board of Directors formed a committee dedicated to growth in the Asia Pacific region. This committee will work towards a cohesive strategy for growth and member value across Asia. It creates for members an opportunity to network and grow alongside their peers from across Asia.
2. If you haven’t done so yet, register for the CMT Association’s 2021 Americas Summit. This new format of event promises to bring topical, general, regional and global insights across all time zones. What’s more, our very own editor, Rashmi Shastry, CMT, is a speaker at this event.

The last session of the month saw the quarter and the Financial Year come to an end, with NIFTY50 posting a monthly gain of 161.55 points. Due to domestic and global reasons, the Indian equity markets have remained choppy over the past many weeks. Nifty rebounded from 13700 levels and formed a subsequent high near 15430. Since then, NIFTY50 has remained in a defined range demonstrating a wide-ranged consolidation on the daily charts. It has remained trendless, making it difficult for short-term traders to take definite directional cues. Given the trendless nature of the markets on the daily charts, each short-term view has led to whipsaws.

During such consolidating times, looking at the broader picture, and breaking it down to establish a short-term trend for taking any directional cues goes a long way in navigating the markets in its current form and state.

The factors contributing to the current volatility are both technical and non-technical in nature. On the domestic front, the spike in new Covid cases is a major cause for concern. However, on the technical front, the spike in the US Bond yields and subsequent strengthening of the US Dollar has played out its inverse impact on Emerging Markets like India. Such spikes and subsequent cool-offs in both the Yield and the US Dollar Index, have led to sudden changes in the risk-on risk-off metrics, leaving traders clueless in the volatile markets.

On the Daily charts, what we are currently witnessing is what the Technicians call “noise” in the market. Given such noise on the short-term timeframe charts, any attempt to understand the impact on other asset classes or measure correlations with the equity markets often fail to paint an accurate picture.

The broad and wide range of consolidation has seen the trading range remaining wider-than-usual on the daily charts. However, if we analyse NIFTY’s weekly chart, it appears that it has been consistently making higher tops and bottoms over the past many months. Over the past couple of weeks, it is only indicating a minor retracement within the primary uptrend. The Index is trading well above its key Moving Averages on the Weekly charts and this keeps the primary uptrend intact. The RSI, which is a lead indicator is neutral and it does not show any divergence against the price.

NIFTY is trading above the rising trend line (drawn from March lows) as well as the faster 20-Week MA, which is presently at 14221 that is acting as a proxy trend line for NIFTY. This 20-Week MA is close to another key level of 100-DMA on the Daily time frame charts which presently stand at 14111.

While 15430 continues to act as an intermediate top for the market, 14050-14221 acts as a particularly important support zone for the market in the intermediate-term. This also defines the broad consolidation zone with 14050-14221 levels on the lower side and 15430 levels on the higher side.

It is said that Technical Analysis is both, an art as well as a science. Yes, it is indeed. If we adopt basic classical method to analyse a broader picture, we can certainly break it into a lower timeframe to help us with a near-term view. The current larger technical setup helps us reach two definite conclusions. First, we are in a very broad-ranged consolidation; and Second, so long as NIFTY stays above the 14050-14221 zone, the primary uptrend remains intact.

Market breadth is the analysis of the number of stocks advancing relative to those declining in a given Index, sector or stock exchange. Market breadth is positive when the number of stocks advancing are more than those declining which also means that the underlying sentiment is bullish. The opposite true is when number of stocks declining are greater than the ones advancing which is nothing but negative market breadth.

 

Why is breadth analysis important?

An index may be rising even if more than half the stocks in the index are correcting because the gains made by a handful of stocks pull the whole index higher. Market breadth indicators can reveal these intricacies and warn traders that most stocks are not actually performing well, even though the rising index makes it look otherwise.

Below is the daily chart of Nifty 100 while the subgraph shows divergence in Market Breadth at the start of November 2020 and the resultant fall that followed.

As a stand-alone measure, the advance-decline ratio offers little more than the level of advances to declines, but when paired with other complementary metrics, powerful financial analysis can emerge. Trading solely off the advance-decline ratio would be uncommon in practice. For example, moving averages are most commonly used to identify support/resistance or trends in the short, medium and long term.

Below is the Daily Chart of Nifty 50 with 20-DMA (Green), 50-DMA (Blue) and 200-DMA (Red). We can see that the market has been bearish in the short term and medium term while the longer-term trend continues to remains bullish as Nifty continues to consolidate.

However Nifty 50 is nothing but the representation of its 50 constituents and below is the chart of Nifty 50 universe where price is trading below the 20 DMA which is around 56% which means there are still 44% stocks still trading above their 20 DMA. Such indicators also measure the degree of participation. Breadth is strong when the majority of stocks in an index are trading above a specific moving average. Conversely, breadth is weak when the minority of stocks are trading above a specific moving average.

There are at least three ways to use these indicators.

First: Analysts can obtain a general view with the overall levels. For example, A bullish view is present when the indicator is above 50%. This means more than half the stocks in the index are above a particular moving average and vice versa.

Second: Analysts can look for overbought or oversold levels. With a defined range, chartists can look for overbought levels near the top of the range and oversold levels near the bottom of the range. For example, in the First chart, you can see that every time Breadth entered the 80-100% band it declined and on the lower end 0-20% acted as an oversold region.  So in essence, entering oversold zone represents high level of pessimism and there is scope for some pullback in the ratio and the Index.

Third: Bullish and bearish divergences can foreshadow a trend change. A bullish divergence occurs when the underlying index moves to a new low and the indicator remains above its prior low. Relative strength in the indicator can sometimes foreshadow a bullish reversal in the index. Conversely, a bearish divergence forms when the underlying index records a higher high and the indicator remains below its prior high. This shows relative weakness in the indicator that can sometimes foreshadow a bearish reversal in the index.

The year 2020 was a roller coaster ride for the world of Financial markets. Last year around the same time, a majority of the crowd was talking about how low this market can go, and now fast forward to present scenario where a majority of the crowd is talking about how high the market will go. It is funny but a  proven fact (lesson) in the market that, “only one thing is certain in the market which is everything is uncertain.”

US equity market is leading the ongoing rally in the global equity markets and one of the major reasons behind the same is US federal reserve’s stimulus of $7.7 trillion. This has flooded the market with liquidity. As is regarded by many pundits, Liquidity is the “New Bull”. However, it is important to not to get carried away by the main stream media and be objective by banking more on the chart for the simplest reason that price is always supreme.

To further gauge the trend, lets dive into the major index of US equity market S&P 500, which is also the world’s biggest index in the form of market capitalisation.

As shown in daily chart above, prices are moving higher probably in the form Expanding Wedge pattern or a Megaphone pattern. This is a reversal pattern. What one needs to understand here is that we are discussing one of the probable scenarios. Price confirmation is yet to be received. And below are a few of the key observations to identify the same pattern.

Common Characteristics of Expanding wedge pattern,

• Looks like Megaphone shape
• Internal structure looks overlapping in nature
• Normally 3 to 4 touch points on both the lines
• Negative divergence on momentum indicators

Post pattern behaviour of Expanding wedge pattern is violent and normally we witness severe price correction. The beauty of a Wedge pattern is that it achieves the price target (from where the pattern started) in almost ¼ or sometimes 1/5th of time it has taken too form. For example, if it took 4 months to form an Expanding wedge pattern then normally it will only take 1 month or less than that to achieve the target. That is one of the major reasons why this pattern is a favourite among the traders.

In nutshell, S&P 500 is showing early signs of weakness and the trend is probably in the matured stage. However, it is always advisable to get a cluster of evidence before coming to any decisive conclusion. Major confirmation from price is yet to be seen. Only a break of the lower end of the trendline will validate the pattern and it will give us confirmation of the same. For now, one can stay cautious with their longs because it looks like next big swing is around the corner!

The book successfully takes the reader on an in-depth and thorough journey from knowing the basics of financial markets to navigating the market through understanding and application of the concepts of Technical Analysis in the real world. 

By beginning from defining what financial markets are, the authors have begun by laying the foundation in the reader’s mind by explaining the basics of the financial markets. They have ensured creation of a solid base in the minds of the readers in the first section for sound understanding of technical analysis concepts in the next section. They have gone on to explain the identification of trend, continuation, and reversal patterns along with the use and interpretation of Candlestick charts for identifying different formations in the most simplistic and lucid manner. 

In this book, they have taken the concepts of Technical Analysis further by dealing with tools like Moving Averages, Momentum, Volatility and Volume Indicators, and the interpretation and application of these tools in an easy-to-understand manner. 

Advanced topics like Time Cycle Analysis and Elliot Wave Theory have been dealt with in its most lucid manner, helping the reader grasp the concepts easily. 

All throughout, the concepts and theories are backed by detailed case studies and demonstrated by use of exceptionally clean and clutter-free charts as examples. This further enhances the credibility and adds value to their work. 

Both, Smita Roy Trivedi and Ashish Kyal, have displayed their finesse and their thorough understanding of the subject matter. They have inevitably and successfully taken the reader on a most simplistic, logical, and flawless journey of understanding the financial market and successfully applying the principles of Technical Analysis. 

This book is a must-read for any aspiring Technical Analyst and for anyone who is looking for a successful career in the capital markets.