What were you Thinking About When the world Panicked?

Published: Fri, 07/23/21

This was a seriously thought provoking week. There have been many knee jerk reactions in the months before but I held my own. This week I even as I did, I was more worried than I have been before because markets lack volumes and that means that if a large player panicked into selling the impact would be far more than would have ben otherwise. This is a double edged sword. It can also work on the way up. If the bears give up and the funds sitting on the side realize that the real opportunity is on the upside the push that buying can have is also significant on the upside. For the time being there has been no big volume on either side.

This gives us time to question our narratives and deepest fears. Fear of a market crash is the most common and that gets added to fear of rising interest rates and inflation. Fear of an economic slowdown? Fear of a Bubble? Fear of Valuations.

But do you have a narrative that has been driving the markets higher. Apart from the liquidity argument, backed by QSAP, and government spending. The case for the business cycle changing for the better, kicking off a new capex cycle, real estate demand etc. The case for lower interest rates in India being sustained by RBI intervention, triggering new consumption and corporate borrowing. None of this can happen in a day but how about over the next 2 years?

This requires imagination. But in the short term I let many of my charts guide me and if you did not read them I have put together a list of important ones that set the course this week that are still relevant and trending. Enjoy

Rohit Srivastava

The Truth About the Markets

Today's Updates

Dow Jones Banks index

The US bank index has pulled back to the wave IV region of the previous rally in wave 4. So the labeling of the Bank nifty and the US bank index will end up being similar. Both have a 5th wave pending on the upside. This is the ideal region for wave 4 to complete so the downside should be limited.

Russel 2000

Russel 2000 had a running triangle in wave IV and the five-wave rise post the completing of the triangle pattern was wave V of 3. Now Russel 2000 is in wave 4 and it is back to the range of wave IV of 3. This would be an ideal range for wave 4 to complete its corrective phase and start its next leg of up move. Also, the daily RSI is now in the oversold zone.

Bse Auto

After the wedge-like formation I was bending towards wave 5 up starting for the Auto index, but I have second thoughts. The market has become narrow and the NIfty reflects that. Not all sectors participating. Thus auto stocks may underperform for longer than expected. The BSE Auto index wave counts have been marked to complete a 5 wave advance inside the previous rising channel. This change means that the falling wedge is a leading diagonal in wave A of a correction in a larger wave 2 circle. A third wave down in C may therefore be pending for the Auto stocks. Any bounce in the Auto index could be part of the B wave and may find resistance near the trendline of the X wave highs at 24177.

Bears go overboard - Or is it the Bulls?

In 2018 I used to keep publishing the record Puts sold by Option writers into each top subsequent to that. Now we have had an opposite scenario over the last few months and specifically since June.

When the Open interest goes up in Call options usually it means that a lot of people are buying them, with a bullish view. But for every buyer, there is a seller and the rise in Call options open interest also reflects the bearish view of people selling Calls as a hedge against their portfolio, or naked options sales by option writers. The observation of historical data shows that market declines are associated with rising Call Open Interest over and above Put Open interest. This has been going on for most of June and July. But when it reaches an all-time record it reflects an extreme bearish sentiment that occurs close to market lows when everyone sells Call options at low prices with the objective of earning the Premium. As of yesterday's trading, the total value of Calls that are open above the total number of Puts that are open is 135,793 crore. This is the highest on record [see the green bar below]. Given tomorrow is the weekly expiry the Call option sellers may win due to the overhang of longs on the other side. But the sentiment reflected by this action could quickly change the trend from down to up as bears get exhausted. Let's see

Dow Jones Industrial

Dow Jones Industrial (DJI) formed an expanded flat and wave structure suggests that Wave (II) is possibly complete and now Wave (III) is in progress. While forming an expanded flat pattern, the daily momentum indicator also nearly completed its pullback and has now turned around. As Wave (III) plays out DJI can possibly rise higher towards the equality level of 35325 and once that is surpassed, the up move can stretch higher towards 36315 i.e. 161.8% of Wave (I). On the downside, the swing low of 33742 will now be a crucial support level to watch out for.

Dow Jones Transport

Dow Jones Transport (DJT) retraced 50% of Wave III and has seen a sharp reversal thereafter. In yesterday's session, DJT tested the 20DMA and the upper end of the falling channel and closed over there. If DJT surpasses this hurdle, it can also face some resistance at the 40 DEMA which is currently pegged at 14912. However, once that is cleared, the bulls should possibly take charge and with Wave V unfolding, DJT can re-tested the May 2021 high of 16170. Positive divergence is visible on the daily momentum indicator and it is now on the verge of turning bullish. On the way down, the swing low of 14080 will act as a major support level in the forthcoming trading sessions.

BSE Capital Good

The BSE Capital Good index has been trading above the 20DMA despite the recent correction in the market. The index is witnessing subdivisions in Wave 5. Within Wave 5, the BSE Capital Good index is in Wave III which is further getting subdivided. So it looks like there is a long way to go for this index. In the short to medium term, the conservative approach suggests the BSE Capital Good index can possibly rise higher to 26100 where Wave III will be equal to Wave I. The 20 DMA and 40DEMA which are currently pegged at 23063 and 22770 respectively will provide support on the way down.

BSE Power

The BSE Power index has been in a corrective phase and the wave count suggests it is currently in Wave 4. Within Wave 4, the index is possibly forming a falling wedge pattern and is currently in wave e. On the way down, 2590-2585 i.e. the lower end of the falling wedge pattern will be a crucial support zone to watch out for in the near term. The other scenario is that If the lower end of the falling wedge pattern is broken decisively then the correction can extend to the previous Wave IV. Trading above the key moving averages (20DMA and 40DEMA) will be an initial confirmation of reversal in BSE Power.

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Rohit Srivastava
www.indiacharts.com
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