Welcome readers, to another edition of Technical Insights!
It’s been a difficult couple of months as we deal with the second wave of a virus that has taken over a better part of our lives for more than a year now. I sincerely hope that you and your families are safe and healthy.
The market too has reflected a similar rollover in sentiment, which naturally continues to play out even now. It’s amazing how the market acts as a living, breathing organism that ebbs and flows with the emotion of its main constituent- the people.
While we continue to observe long-term base breakouts in indices across the globe, we’re also witnessing a slow-down in momentum in a few. But what does that mean for market participants? Well, for starters, one would have to be fastidious in their selection process. To get a slice of this pie, one would have to pay greater attention to detail, focus on sector rotation and plan their portfolios accordingly. We’re not in the 2020 market rally where stock selection was relatively much easier! But then again, as technical analysts I think we’re built to handle such market moves.
But what does it mean to be a technical analyst? This is my take on it.
As a technical analyst, one is expected to observe price data and the trends that have formed in the past, to gauge the possible future outcomes. Does that mean that a particular view is set in stone? Certainly not. Can the analyst be wrong in their analysis? Most definitely. Does that mean one should give up when they’re wrong? Not at all! The beauty of this subject is that you can be on both sides, but you will always be protected by a risk management strategy (that is, if you are vigilant).
In my opinion technical analysts have what it takes to excel in any market conditions. At the core of this belief is that for every given trade, all the levels are in place. Entry as well as Exit (be that a target or a stop loss).
So, what’s the caveat? Patience. Years of learning and experience lead to sharp analysis and execution. As a field, it demands your complete attention and takes you on a roller coaster ride before you’re ready for the next one!
To all those who are finding their way, give it time and a lot of introspection. Eventually you will reach a point where failed moves won’t deter you and successful moves won’t blur you. That’s the goal!
Since the market has been messy for the most part, this month we have a write-up each about the outlook in Equities, Gold and INR. In addition to this we have a blog on stock specific pattern identification as well.
P.S – The Americas Summit 2021 concluded recently and I had the rare honour of appearing as a speaker. It was truly an enriching experience and if you haven’t already, I’d definitely encourage you to check out the videos on the Digital Guide. There’s decades of information in those few hours of content that is certainly worth your time!
Until we meet again, Think Technical!
Rashmi Shastry, CMT
Behind the Scenes: Unsung Hero, Testing updates, and the stars of the Investment Challengeby Joel Pannikot
As India continues to reel under the devastating second wave of the pandemic, I pray that all of you and yoru families have been doing well. Please continue to stay safe and take the utmost...
Month Ahead: NIFTY To Stay Largely Range-bound; Equities To Relatively Underperformby Milan Vaishnav, CMT, MSTA
After marking the lifetime high of 15431 in February 2021, April was the second month in a row when NIFTY has not breached its previous high point and has demonstrated tentative behavior which takes...
INDIA RUPEE: Likely to appreciate as the COVID wave peaks…by Anindya Banerjee, CMT, CFTe, CCRA
Financial traders are betting on a simple template since last year: covid-on & sentiment-off or covid-off & sentiment-on. Since March of this year, COVID cases have surged in India and that...
Naukri - The supporting all-rounder in the IT sectorby Kush Ghodasara, CMT, CFP
Cricket fever was catching up momentum with the IPL points table getting more and more competitive with each game played. All the teams this year had a balanced side, making the competition a roaring...
Using Intermarket Analysis to form a view on GOLDby Jigar Mehta, CMT
Gold continues to be in the limelight whether its in an uptrend or a downtrend. This commodity is always on the investors and traders radar! From the highs it has lost almost 20% and now seems to be...
As India continues to reel under the devastating second wave of the pandemic, I pray that all of you and yoru families have been doing well. Please continue to stay safe and take the utmost precautions. Neither covid, nor covidiocy are over.
There has been a lot of concern over whether the CMT Association will be able to conduct the June exams in India. We are in constant touch with our testing partners, Prometric, and have been tracking the situation closely. As things stand, the exams will continue as planned, and Prometric is able to support both test centre, and home based testing.
On to brighter matters.
Leveraging the success of our adoption of Discord as a communication platform, our unsung hero for this month, Foram Chheda, CMT, has taken the lead in implementing the Advisor Network.
Seen here with the legendary Martin Pring, Foram has been an active volunteer leader with the CMT Association since the beginning of our official presence in India in December 2018. This picture is for the Inaugural India Summit in November 2019, when Foram was a part of the organising committee for the Summit and worked tirelessly behind the scenes to manage production of the fireside chat series which you can now enjoy on YouTube. She is now part of the volunteer leader team in charge of enhancing the Membership experience. The Advisor network is a key initiative on this front.
The idea behind the Advisor Network is to create, well, a network of advisors. In the journey of our members through their careers and with the Association, there is always someone from whom they can learn, and someone who can learn from them. The first implementation of the Advisor Network will be a series of weekly guidance sessions where Level 1 candidates can seek inputs from Level 2 candidates, who in turn can reach out to Level 3 candidates, and so on. These sessions will happen in the CMT Members Area on Discord every Saturday.
Results of the CMT Association’s Inaugural Investment Challenge
The challenge has unearthed diamonds in the rough, and we are already getting interest from recruiters who want to speak with the top performers for internships and full time roles. Check out some of the key stats below.
After marking the lifetime high of 15431 in February 2021, April was the second month in a row when NIFTY has not breached its previous high point and has demonstrated tentative behavior which takes the form of a consolidation on the long-term charts. In the month of April, NIFTY did not take any directional cue, consolidated in a wide range, and ended the month flat losing 59.60 points (-0.41%) on a monthly note. The trading range, though, remained wide as the headline Index oscillated 892 points before posting a negligible monthly loss.
Analyzing the long-term monthly charts of NIFTY as well as looking at the broader multi-asset class picture hints that this consolidation phase may well continue. It also seems like NIFTY claiming new highs may not happen soon, at least not in the month of May.
Following the creation of the high point in February, the month of March saw a formation of a classical Doji candle which resisted exactly at the previous high. The month of April saw the formation of a Spinning Top, which is a classic indication of the markets not taking any directional cues and displaying a tentative and indecisive behavior.
While the monthly MACD stays largely bullish, the RSI, when subjected to pattern analysis shows a mild bearish divergence against the price as it did not mark higher tops along with the price action.
Analysis of the macro asset allocation picture seconds this behavior of equity markets.
The Relative Rotation Graph (RRG) shown above shows different asset classes benchmarked against VBINX – Vangaurd Balanced Index Fund. Notice how the risk-on profile is slowly taking the shape of a risk-off environment. Commodities, represented by DJP (iPath Bloomberg Commodity Index Total Return ETN) and GSG (iShares S&P GSCI Commodity-Indexed Trust) are rapidly paring their strong relative momentum. On the other hand, safer assets like LQD (iShares iBoxx $ Investment Grade Corporate Bond ETF) and GOVT (iShares Core US Treasury Bond ETF) are sharply improving their relative performance and momentum; GOVT has already rolled inside the improving quadrant where it accompanies USD (US Dollar Index)
What further corroborates the view is the Equities represented by ITOT (iShares Core S&P Total US Stock Market ETF) slipping inside the weakening quadrant. With equities rolling over into the weakening quadrant, it hints at a likely end of its relative outperformance as an asset class.
If we corroborate the technical views on NIFTY and the multi-asset RRG, it leads us to an important conclusion. Equities, as an asset class may continue to perform individually, but its relative outperformance against other asset classes may take a breather. NIFTY is expected to stay largely range-bound in the coming month with the levels of 15430 and 15530 acting as potential resistance and the levels of 14200 and 13880 acting as potential supports with some increased amount of volatility remaining ingrained in the markets.
Financial traders are betting on a simple template since last year: covid-on & sentiment-off or covid-off & sentiment-on. Since March of this year, COVID cases have surged in India and that has taken a toll on not just equity markets but the Indian Rupee as well.
Between October’20 and Feb’21, when COVID cases decelerated in India, Nifty clocked an average gain of nearly 5.5%, an above median gains when compared to its peers. However, since March 2021 as COVID cases surged, indicated by the green boxes which highlight the m-o-m growth in average daily rate of new cases, Nifty has underperformed its peers. Underperformance in Nifty reverberated in the currency market as well, where Rupee had suffered big losses.
In March, Rupee was saved by the year end repatriation flows from exporters. But April was a brutal month for the currency. The above graph shows how well major currencies performed against the Indian Rupee. Brazilian Real was the best performer with nearly 7% gains in just a month. Median gains against the Indian Rupee were around 3.1%. A clear indication, that Rupee has a lot of ground to catch up once the COVID wave peaks.
One cannot trade the Rupee without forming a clear view on RBI’s action. RBI remains the biggest player in the market and whose aim is not to generate profits but to either curb volatility or swing rupee as per macro-economic needs. The above graph shows how RBI has intervened quite aggressively when capital flows jumped above 2% of GDP in any quarter. The x axis denotes the RBI buying of USD in spot. A negative number denotes RBI’s purchases, whereas, positive number indicates RBI sold USD. On y axis, is the capital flow in a particular quarter as a % of the quarterly GDP. The colour coding, which is represented by the colour bar on right denotes the gains or losses in USDINR. If it’s a shade of green dot, it means USDINR closed higher for the month. Shade of red dot denotes, USDINR closed lower for the month.
USDINR: Spot price chart
I conclude with the chart of USDINR. Macro backdrop is indicating that COVID remains the single biggest cause for Rupee’s underperformance and once the wave peaks, Rupee may appreciate against USD and other peers. We are already seeing early signs of that appreciation. USDINR chart is smacking off a price range. RBI has been selling $ aggressively near 75.50. At the same time, going by past behaviour RBI may turn a major buyer once again below 73.00 levels in USDINR. Therefore, for the next 3 months, a broad range of 73.50/74.00 and 75.50 may unfold in USDINR, unless some unknown-unknowns dominate market trends.
Cricket fever was catching up momentum with the IPL points table getting more and more competitive with each game played. All the teams this year had a balanced side, making the competition a roaring experience. But what makes the side stronger in the shorter format of the game? A good opening batting line up? Or a good bowling line up?? …I believe it’s always all-rounders who are game changers and are crucial for the team to win. But they are always undervalued or less talked about.
One of such all rounders in the IT Sector is performing equally well and generating handsome returns for investors i.e., INFO EDGE LTD (NAUKRI). The stock has been outperforming the IT index as well as the overall market since the pandemic lows observed in March 2020. If we look at its businesses such as NAUKRI.COM, POLICY BAZAAR, 99 ACRES, JeevanSaathi and investee company ZOMATO, all these names are going through a golden era with Pandemic. This is because the common public is moving online with more requirements every day. Keeping fundamentals aside, even technical charts are showing some signs of short-term momentum.
Above is of the daily chart Of Naukri and as we could notice on 26th April that NAUKRI broken out above the Inverted Head and Shoulder pattern. This pattern is a bullish reversal pattern generally forming at the end of a down-trend. We can see that this time too, the pattern has formed at the recent low of 4023 which is considered to be the HEAD of the pattern for our study. The stock has also broken out from the downward sloping channel in the course of forming inverted H&S. The neckline, which acts as a resistance line during the formation, is placed at 4885 and therefore the target can be calculated upon a breakout above the same. The target when calculated upon breakout comes to 5747 which was the difference between the HEAD (4023)- Neckline (4885) = 862 and adding that difference to the neckline (4885) to arrive at 5747. For support going forward, there aren’t any specific rules but generally the guideline is at the low or right shoulder which is at 4480.
While discussing top-ranked IT Stocks, we generally tend to forget NAUKRI but the stock is an all-rounder and is contributing wisely to investors’ portfolios and is expected to do better in the coming days!
Using Intermarket Analysis to form a view on GOLD
Gold continues to be in the limelight whether its in an uptrend or a downtrend. This commodity is always on the investors and traders radar! From the highs it has lost almost 20% and now seems to be ready to shift gears again.
From an Intermarket perspective, US Dollar index (DXY) and US 10 Years T – Yields have an inverse co-relation with Gold. During 2020, DXY and US 10 Years T – Yields, both were tumbling which acted as good tailwinds for Gold, however post August 2020, Yields started to rise (from 0.49 to 1.77) due to which Gold failed to perform well and remained under pressure. Thus it is important to keep a close eye on Yields as well as DXY.
US 10 Years T – Yield Daily chart:
US 10 Years T – Yield shows that it has tested the downward sloping trend line which connects prior swing highs. Here, the trendline resistance is placed at 1.73-1.78 levels which will be crucial to observe over the next few days. Rate of Change (ROC) clearly shows deterioration in upward momentum over the last 30 days. Thus from hereon, any move below 1.52 will indicate broader consolidation in the range of 1.30 and 1.75. This seems to have started which is likely to support Gold’s rise! On the contrary, a close above 1.78 can maintain the pressure on Gold!
US Dollar index (DXY) Weekly chart:
US Dollar index (DXY) chart shows that the medium term downtrend is intact. Recently a pullback towards the upper Bollinger Band near 93.00 was observed however, post that it has given up more than 50% of the gains. This suggests trend likely towards 89-88 levels has started. Such price action suggest bearishness for DXY which is positive for Gold.
LME Gold Spot Weekly Chart:
Now lets look at Golds trend:
- LME Gold Spot indicates that prices took support near $1676 which is the 61.8% (Golden ratio) retracement of the prior up move from $1452 to $2073 levels.
- 100 week EMA (Exponential moving average) has continued to provide medium term support. It has worked well this time around as well.
- Upward sloping channel which is connecting the prior 2 intermediate lows has acted well as a support which increases the possibilities that medium term lows have been formed near $1676 levels.
- Gold managed to find support near the downward sloping channel and formed a “Double bottom pattern” (on shorter time frames) and now we can expect it to move higher towards the channel resistance.
- RSI turned higher from 35-40 zone and has broken the downward sloping trendline in the indicator. This is also an early sign for a trend reversal.
- MACD is displaying a positive crossover for the first time since September 2020.
- In short, Intermarket analysis followed by the above technical indicators suggest that Gold has bounced back from the crucial juncture and hence bullish probabilities are higher from hereon. However as we are in the game of probabilities, this view will remain valid as long as recent lows near $1675 level are intact on the downside. On the upside it is likely to test the channel resistance near $1865-1870 area. A close above the same zone will be the second bullish confirmation for the uptrend towards $1955-$1960 levels.
Co-authored by Rakesh Gandhi
New Educational Content This Month
October 19, 2022
New Horizons on the Relative Strength Index
Presenter(s): Sofien Kaabar, CFA
October 12, 2022
Are The Streets Still Smart? Evaluating Swing Trading Strategies in Modern Markets
Presenter(s): Davide Pandini, PhD, CMT, MFTA, CSTA
September 14, 2022
Candlestick Analysis, Enhancing Portfolio Management Returns
Presenter(s): Stephen W. Bigalow