Nifty this week: rinse and repeat

20 Jun 2020
Nifty this week: rinse and repeat

US Federal Reserve’s balance sheet shrank week-on-week for the first time since February this year. Will this spoil bulls party on Dalal Street. nifty-week ahead, 30 stades, bulls and bears

Noticed what the favourite quote of market cheerleaders has been lately? What else but the good old one:

“Market climbs a wall of worry.”

How else would they be able to justify a market that is ignoring border tensions between two nuclear armed neighbours at the time of the worst pandemic in a century? When you are an ‘expert’, but don’t have an answer and are too timid to attribute rising stock prices to just a tsunami of liquidity, you fall back on such banalities, isn’t it?

Ironically, it’s not that Indian stocks have just been rising relentlessly in the last few weeks that would require such statements to be pulled out of the closet. In fact, the high we hit on Friday (19th June) was actually significantly lower than the high we had hit the previous week. And in between we had collapsed over seven per cent in a matter of four days.

Also Read: 10 tips to buy stocks without taking undue risks

What we are witnessing currently, actually, is a very bipolar market.

Dalal Street is witnessing big gap downs that are being bought into and large gap ups that are mostly being sold into. There’s no clear trend and the ones that are developing, more often than not, evaporate in a matter of hours.

Nifty this week, bulls and bears to fight it out, 30 stades, reliance, nasdaq, nifty

So close, yet so far

The upcoming week is, again, likely to see a repeat of this trend. While the Nifty’s 200 Day Exponential Moving Average (DEMA), at 10526, is three percent above its Friday’s close, it’s most likely that bulls will again fall short of testing it. Even if they do, it’s very likely that the same won’t be held for more than a few hours.

One of the main reasons for this could be that even with all the euphoria around, the bull flag bearer of these last three months – the Nasdaq Composite – couldn’t hold on to the major psychological level of 10,000 last week. In fact, all it seems to have done last week is make a lower top, which becomes a perfect low risk-high reward stop loss for bears to start testing the resolve of the bids under it.

Also Read: How to buy health insurance in the post-COVID-19 world

Secondly, and this may sound like sacrilege to many, shares of Reliance Industries (RIL) might just have made, or may soon be making, a major top. As the chart shows, the over six per cent jump by Reliance Industries (RIL) shares on Friday have taken it to a major resistance line formed by joining the tops made in 2018 and 2019. If RIL’s shares -- which have the single highest weightage of 13 percent in the index and accounted for nearly a third of the rise in Nifty from March lows -- start to correct, there’s a big chance that the index itself flounders.

Nifty this week, bulls and bears to fight it out, 30 stades, reliance, nasdaq, nifty

Reliance stock price, adjusted for rights issue, has more than doubled since its March lows and has been crucial for the resilience of the market in the last three months.

No bears left to trap

There’s also the fact that on Friday, weekly, monthly and quarterly option contracts on the S&P 500 expired after what can be unquestionably described as one of the most volatile months in history.

Also Read: How can you generate higher returns on savings after interest rate cuts

From a positioning point of view, it’s not unlikely that those who benefitted in the massive surge in the S&P 500 in the last three months, have no more vested interest in taking the index any higher and hence if there were to be a trend reversal, it’s likely to begin now.

There’s also the fact that last week, the US Federal Reserve’s balance sheet shrank week-on-week for the first time since February this year. At one percent, it’s the biggest contraction in the Fed monetary base in nearly one-and-a-half years.

And post Lehman Crisis history tells us that bulls always get into trouble whenever the Federal Reserve refuses to indulge them with its dollar tap. So play the momentum but don’t go too far in taking a position on either side.

(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.

Also Read: Use Covid-19 crisis to buy assets which will generate cash flows year after year

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