Weekly Market Recap
Last week, I wrote about diminishing downside momentum and the possibility of double-bottom formation, and this week we saw NIFTY gradually pullback towards the lower end of the range only to recover sharply to the highest point of the last two weeks’ range. NIFTY fell almost 400 points in a row till mid of the week, however; eventually finished the week in the green.
In the week gone by the benchmark, SENSEX gained 558 points, or 1.03% to close at 54884, and NIFTY closed up by 86 points or .53% at 16352. While BANKNIFTY led the advance and surged almost 4%.
Current Outlook
Since the NIFTY has respected the earlier low and the seems to be holding in this area for the last few weeks as a result double-bottom formation is in place, however, NIFTY has witnessed a stiff resistance at the 16400 level as we can see in the chart below; it has been unable to cross that level and once again the rally has stopped at the same level. Now, we have to see whether this resistance level would be easily taken out or not incoming session. Once the breakout occurred, NIFTY may further rally a few hundred points. However, we are not yet completely out of woods, the market is still in a downtrend. It is indispensable to note that the false breakout has been the salient feature of this bear market. The stock prices are turning around sharply for the sustained and deep pullback only after having a false upside rally. This has been the common phenomenon of this recent correction across all asset-class whether it is equity, commodity, or crypto.
For the last three months, I have been cautious and writing about the possibility of having sharp pullbacks, however, investors appear to have widely transitioned from the “disbelief” phase (“There’s no way this market is going lower.”) to the “acceptance” phase (“Oh my, this is definitely a bear market!”). The challenge at this point? Bear market rallies, like the one we experienced this week.
Whenever the “acceptance-phase” comes in the market tends to have countermoves. And countertrend rallies in bear markets can be usually described as sudden, severe, seductive, and full of shenanigans. They happen suddenly, with the market making new swing lows one day and then ripping back to the upside immediately after. This particular rally was punctuated by hammer candles followed by other bullish patterns. They are also usually severe, meaning they make up lots of ground in a relatively small amount of time. And they tend to bounce higher so quickly. As we can in the chart since October all-time highs after every pullback rally have been quite sharp and took relatively less time than correction (enunciated by the blue line).
Hence, despite the short-term bottom seems to have taken place the change of trend is not certain.
Conclusion
To differentiate a bear market rally from the beginning of a more meaningful recovery, first, we would need to see the NIFTY break above key resistance levels. And I would have to admit that the way NIFTY has recovered from its lows in the last two sessions is quite impressive, but it might face strong resistance at the current level.
Second, I would have to see an influx of positive momentum. The indicators in the below panel should be able to record higher or over-bought readings since October RSI has not been able to cross above 70. Hence, it is prudent to wait patiently rather afraid of missing the bottom.
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Be Patient; Be a Savvy Investor..!!
Pankaj