Every object will remain at rest or in uniform motion in a straight line unless compelled to change its state by the action of an external force. – Sir Isaac Newton.
Now, let’s apply this law of inertia to two objects – the Nifty and COVID-19 cases in India. As one can see from the chart below, the Nifty has been moving up in a clearly defined channel since making a low in March.
This got further confirmed last Friday. With major US indices collapsing over six percent on Thursday, the Nifty, like most other indices in Asia, opened for trade on Friday with massive losses, but immediately found support at the lower end of the channel and kept moving higher all day, finally ending the day with minor gains.
Last week as a whole, however, clearly indicated that the Nifty’s upward thrust is losing momentum and a test of the upper end of the channel is now looking extremely difficult. Forget a test of the channel resistance, the fact that the Nifty couldn’t even test its 200 Day Exponential Moving Average (DEMA), currently around 10550, even at the highs of the week prove that, by drawing a parallel with the law of inertia, a change of its state might just be beginning due to the action of an external force.
What could be this force?
Unless you live in a cocoon or are someone who believes that criticizing and questioning the government of the day is seditious, you surely must be clear that the number of COVID-19 cases in India is only going to rise from here on. Not only are we reporting a record high number of new positive cases almost every day, despite one the lowest testing rates in the world, but there is now an apparent lack of any decisive strategy to control the progress of the pandemic in the country.
This could prove costly for the market because if you remember, the market meltdown in February started with the rise of the pandemic in India.
Their world exists below it. The only positives that bulls can take from last week’s price action are the fact that the channel support was respected and despite all the reasons to close below it, the Nifty ended the week just marginally above 9970 – 50 percent retracement of the entire February-March fall.
Last week also reaffirmed the theory that this article has been proposing for some time now. Our belief is that India’s broader market and benchmark indices are almost unwittingly being dragged up due to the strength in the US indices. So, as long as the party continued in the US, we were reluctant participants.
So, while trading the Nifty, keep an eye on the key 2960 level on the S&P 500 index. A breach of 2960 level will most likely see a breach of the channel support for the Nifty. And the resumption of the horror movie we last saw in March.
So keep your trading position in Nifty hedged and don’t take too much risk until the index breaks out of this narrow trading channel on either side.
(Lead Illustration by Shefali Saxena)
(The writer, T-Rex, is not a dinosaur. He is a technical analyst from the previous century.)
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of 30 Stades.