Technical Insights, March 2021

As you read this article, we are in the second live week (third in all) of the CMT Association Investment Challenge February 2021. This is the first edition of what promises to be an exciting initiative with tremendous potential. The challenge is open to active candidates of the CMT Program, who are appearing for exams of Level 1, 2 or 3 in June, as well as for students of institutions that are part of our academic partner program.

The technology partner for this event is Trader’s Cockpit, and you can visit their new platform Astute, here.

The challenge is shaping up to be an exciting test of technical analysis knowledge and skill. In order to help participants put their best foot forward in the challenge, CMT charter holders have stepped up to guide them by creating useful learning resources and by contributing their time to answer questions on Discord . One of the leading contributors is our first unsung hero, and volunteer in focus, Prasenjit Biswas, CMT.

Prasenjit works as Derivatives Analyst at Kotak Securities. He received his CMT charter in 2017, and has been a vocal advocate for the CMT community. Not only has he helped the association liaise with his firm, but he has also helped to create learning content for the participants of the Investment Challenge. You can view the videos he recorded here.  He is also working on developing his own market breadth indicators. We wish him all success for this.

Social Media engagement is an important long-term initiative for us. While it is valuable for technical analysts to maintain a constant dialogue among themselves, it is also important for them to engage with other key stakeholders who have a say in their careers. Stakeholder groups include regulators, markets journalists, academics, HR professionals, company leadership and more. For example, if L&D managers understand the importance of technical analysis to various roles within their firm, they would be able to deliver far more value to their firm by creating relevant learning pathways.

These are folks who ordinarily wouldn’t seek to learn more about our discipline, so it is up to us to reach them. Social media, particularly platforms like LinkedIn and Twitter, give us an opportunity to do this.

Simply put, the strategy is to write a post every day, for the benefit of a different stakeholder, and to tag the people to whom the post will be relevant in the replies/comments of the post. With an active candidate and member group of over 600 in India alone, such posts can reach thousands of key stakeholders within a few months. The posts will be targeted to different ecosystems each day of the week. #MembershipMonday #RegulatorTuesday #AcademiaWednesday #EmployerThursday #MediaFriday are the hashtags to look out form

Volunteer leaders have already begun to curate posts for their respective pillars. Abhishek Chinchalkar, CMT has already curated 25 posts for #AcademiaWednesday effort, earning him too a mention as our unsung hero this month.

Abhishek is the Head of Education at FYERS, and a CMT Volunteer leader working with academic institutions. A CMT charter holder since 2018, Abhishek has been actively involved in the growth of the association. He regularly mentors CMT aspirants, and helps build connections among members and organisations. He has also conducted training sessions for Refinitiv, and reputed business schools across India.

Since our adoption of Discord as a platform for communication, we have seen a tremendous spike in engagement. If you haven’t done so yet, be sure to join and participate.

To take a view on this, let’s look at the chart of the benchmark 10-year GOI security. This paper is the most traded security among all Government Securities. The current benchmark security is the 5.85% GS 2030 paper. RBI issues a new benchmark security with maturity of 10 years, usually, once a year.  Occasionally, it has issued two benchmark securities in a single year. In FY 2021, the Covid pandemic forced the Central Government to go for significantly higher market borrowing and as a result, the RBI issued three benchmark securities within a span of seven months. The current benchmark security, being the most traded security, the yield on this security is closely watched by market participants to determine the likely trajectory of interest rates over the medium term.

In the Monthly Chart above, it can be seen that the yield movement over the 12-year period has been contained within the 6-month high-low range of July 2008 & January 2009. The mid-point of this range is placed at 7.17% and this level too has witnessed some trading action.

In September 2018, yields had registered a high of 8.23% and subsequently, yields made a series of lower tops and lower bottoms until the May 2020 low of 5.66%. After consolidating above the 5.66% level for several months, yields have made a decisive upmove this month (February 2021).

The question that is to be asked is – Is this upmove signaling a change in the trend that has been in place since September 2018?

If we look at the Weekly Chart above, we can see that the yields have clearly moved beyond those moving averages that had held back upside progress since December 2018. The 8-Week Wilder’s Average has once again moved above the 13-Week Wilder’s Average. It had gone below the 13-Week Average in December 2018. The 20-Week Wilder’s Average which had capped all rallies for the past 2 years is now decisively overhauled. The 8-Week Average is at 5.99%, the 13-Week Average is at 5.98% and the 20-Week Average is at 6.01%. The area around 6.00% is, therefore, a crucial support level for yields. The Weekly RSI value, too, is trading above the 55 levels which had earlier acted as a resistance level.

Summary:

If the 6.00% level holds, it is likely that yields will grind their way higher in the coming months. The 50% fibonacci retracement level of the fall from the September 2018 high of 8.23% to May 2020 low of 5.66% is at 6.95% while the 61.8% fibonacci retracement level is placed at 7.25%.

Trading in markets looks easy but, it is far from it and this fact is discovered soon enough by any novice trader. Teachers teach and students learn price patterns and indicators, hardly realising that the battle lies not on the screen but within themselves. If we are disciplined, our emotions will become minimal, and this will lead to a better rate of success. Let us see a few common errors and some suggested solutions. 

 

Letting go – We human beings assume that we can control our lives, and trading offers us just another opportunity. However, just as it happens in real life, this “control” is a mirage, and expected outcomes seldom occur. As traders we somehow believe the markets will and must behave as per our “plan” – buy at 100, stop loss at 95, target 115, risk to reward ratio is 1:3, money management allows 1000 shares. The truth is that after we press the trigger at 100, we have no say in the matter. The price may or may not go to 115. If it does, we feel awesome; and if it does not, we feel despair, frustration, and anger. 

 

Why should we wait for the target at all when time and again, it proves to be a futile exercise? It messes with our mind and emotions; and we make terrible trading decisions. The solution is to concentrate on what we are able do – manage the trade with stop loss. Then the entire trade becomes mechanical, simple and with minimal tension; and leads us to better decisions and consistent results. That begs the question – what about our risk management parameter? Of course, you should assess the potential trade for a possible target, and then go for the trade only if it fulfils your risk management parameters. Once we are in the trade, simply forget about it. Let go. 

 

Realism and patience as virtues – We read fantastic social media stories of gigantic profits being made in the markets. We seldom read about losses! This plays on our mind, and we berate ourselves that others are doing better than us. This is just not true. Genuine traders will hardly let us know their real P&L! If you dig a little deeper, you may find that many such publishers are selling a training course or a software as a side business. While that does not mean that the stories are all untrue, we should not compare our own trading to that of these professionals. Avoid this self-flagellation. The answer is to set realistic goals rather than running after trades, and patiently wait for the good setups to take shape rather than pre-empting a trade. Then we pull the trigger. We may miss some trades – so what? In a buffet, it is not necessary to taste all the dishes. Just enjoy what you have on your plate. Be realistic and patient. 

 

Dispassion towards a stock – We all have our favourite stocks where we have made good profits, and our hated stocks where we have lost money. This notion itself is a bit silly because stocks are not living beings capable of favouring us or otherwise. Even when a trade in our darling stock presents itself, we should stick to our established routine, position size, and not assume that we have some special connection with it. And, if we are making a loss in a particularly hated stock, instead of being angry and trying to force a profit from that very stock by doubling down, the prudent thing to do is to just accept the loss and move on to the next trade. 

 

Trading is profitable and fun if we can do it with minimal tension. Else it is a lost endeavour. 

Since the beginning of 2008, the USD/INR exchange rate has been in a major uptrend. During this 12-year period, the pair has doubled from sub-40 levels seen during the end of 2007 to nearly 80 levels in April of last year. The strongest part of this uptrend occurred during a two-year period between Aug’11 and Aug’13, during which time the pair surged from 44 to 69.

As you can see in the above weekly chart of USD/INR, the pair has traded above a rising trend line connecting the Aug’13 low with the Jan’18 low. The pair respected this trend line during the intermediate downtrend of 2019. It has again respected this trend line this week, but this time even more firmly than it did the last time around. Observe how the pair has bounced right off this 8-year trend line. However, what is even more interesting to note is that this bounce off the 8-year trend line has coincided with two other critical supports, namely:

• A previous resistance level that has now acted as a support (Change of Polarity principle)
• The 100-weekly simple moving average

Furthermore, the bounce off these triple confluence support regions has come in the form of a very tall, weekly bullish candle that has engulfed the bodies of 11 prior weekly candles.

All these factors indicate a high probability that a medium-term bottom could have been printed at this week’s low.

Now, notice the above chart. See that the pair is on the verge of breaking a trendline that connects the Apr’20 high and the Jun’20 high. Why would a sustainability above this trend line be critical? Well, to understand, look at the chart below:

See that since 2012, there have been four upside breakouts (excluding the present one) following a period of strong price squeeze and volatility contraction. And on each of the occasion following the breakout, the rally has been quite powerful and swift. A similar pattern has occurred now as well, with the pair breaking out following weeks of contracting volatility and shrinking candle sizes.

Conclusion:

What does all of this suggest? Well, going forward, if the pair sustains above the trend line (_~74) drawn from the record highs, it could signal the resumption of the primary uptrend and within that, the start of a new leg higher in the coming weeks/months. In such a case, we could see the pair surpassing its prior peak of 77, for a possible move towards 80 and beyond.

Invalidation:

Of course, it goes without saying that views are not infallible. What is important is to have in place a stop loss in case things do not pan out as expected. My bullish view will be invalidated if the pair falls below this week’s low of _~72.20.

The equity markets have seen one of the most volatile times over the past couple of weeks. Speaking of the recent past, the equity markets saw some wide ranging volatile moves; bulk of the corrective moves being attributed to the spike in US Bond Yields and the strengthening of the US Dollar.

The events in these asset classes, i.e., the US Treasury Bonds and the US Dollar Index has its own obvious effects on the equity markets in general and Emerging Markets in particular, with India being no exception. However, these are the times when most participants are frantically looking at answers to questions like if the Markets showing any signs of reversal, that if Markets are likely to reverse its trend, that if Bonds and the Yields are the sole culprit of this entire situation.

Before trying to find answers to this, it would be insightful and equally surprising to see as to how going back to basic and rudimentary things provide more clear answers to all the questions.

It is important to note that merely high yields do not act adversely on equities. There have been phases where we have seen both Equities and Yields rising. The rise in yields, per se, is not bad. But the reasons behind the rise are either good or bad. For example, if the yields rally given a fiscal expansion that results into overall growth of the economy, it is good. However, if the yields rise solely on the fear of rise in inflation without any substantial growth, its damaging to the equities.

So, before jumping to solely analyzing yields and the present factors that are more seen and heard in the media, it is time that we take a leaf out of a book that is very basic and rudimentary to any technical analyst. While I say this, I do not imply that the developments in the asset classes like Bonds and the Dollar do not impact the markets. They certainly do. However, looking at a domestic picture will also give answers to our numerous questions for the road ahead for the NIFTY.

For example, the above weekly chart of US 10-YR Treasury Yield shows that it bottomed out between the months of July and October; the first signal came of an impending spike was on the RSI, after which the actual sharp pullback of the yields followed. However, if we look at the domestic charts of the NIFTY50 and NIFTY 500 Index, signs of impending topping out had started to occur since the end of 2020. Those signs were more concerning than the yields that had started to move up.

The above chart shows NIFTY50 and NIFTY500 Indexes plotted along with RSI and Cumulative Advance-Decline Line, which is a Breadth Indicator. A basic and rudimentary look on the charts makes it very clear that all through the past two months that when the most recent incremental highs came, they came with two negative readings. First, the bearish divergence on the RSI. While the Index kept marking incremental highs over the past two months, the RSI did not; in fact, it made lower tops. Second, and equally important, is the cumulative Advance-Decline Line. This breadth indicator showed that the incremental highs came with lesser number of stocks participating, and it did not form new high and confirmed the incremental breakouts that we witnessed.

The conclusion that we can draw from the above analysis is that regardless to what happens to the bonds or the yields, we have enough warning signs on the charts itself. What we have seen on the charts is a very basic reversion to the mean. A classical analysis of the charts shows that the NIFTY or the broader NIFTY 500 has just reverted to the mean after deviating too much and running ahead of the curve. Even if the headline index NIFTY50 tests the 50-DMA which stands at 14485, there will be no structural damage on the charts. All that has happened is that the markets have slipped into some wide-ranged consolidation.

The coming month is likely to see the NIFTY finding very stiff resistance between 15270 and 15430 levels with supports coming in the range of 14150-14485 on a closing basis. Oscillating between these levels will not lead to any reversal of the primary trend but would simply mean some healthy and broad ranged consolidation for the domestic markets.