Markets Getting Out Of The Woods Gradually!
What a roller-coaster ride it has been for D-Street in the last one week. Emotions like fear, hope, ecstasy and greed, all were on the display. The stock markets for the first time have hit a circuit breaker twice in the same year, let alone the same month. India VIX, which is also called the fear index, touched 86.64 on Tuesday. As there was no respite from selling on D-Street, the markets’ watchdog- SEBI stepped in by introducing a set of measures aimed at curbing volatility in the markets. However, the immediate consequence of this move did not serve the purpose as the markets continued to rout but it certainly created discomfort among the aggressive short sellers. Soon, this was followed by multiple announcements, which acted as a ‘twist the knife in the wound’ for the short sellers.
Two major announcements were made: Firstly, US Federal Reserve wrote a blank cheque for US economy as Fed pledged to buy unlimited bonds in order to bolster the economy and secondly, Prime Minister Narendra Modi announced to put entire country in a lockdown for 21-days by stating that the lockdown will help us battle the virus and come out less bruised. These announcements were enough to send bears in a depression and the short sellers had a pretty nightmarish run as Nifty rallied almost 15 per cent from the lows.
If you remember in our last editorial, we had clearly mention that the first barrage in any bear market is fired by the bears i.e. short sellers and it is their profit booking in their open short positions that is likely to initiate the arrival of a rally followed by a cool off in the fear indicator i.e. India VIX. So, we have witnessed both these factors coming into play. Now what’s the way forward? Nifty has posted a double digit rally from the recent lows in a quick span of time and it has closed above its five-day EMA for the first time since February 19, 2020. The leading indicator RSI has been forming a positive divergence for last troughs of 8,555, 7,832 and 7,511 on the daily time scale. However, as every divergence needs price confirmation, Nifty has given the first sign of price confirmation on the daily time scale. Further, in the last three trading sessions, Nifty has closed in green that includes a doji like candle along with a higher high and higher low formation in the last two trading sessions.
What are the key levels to watch out? Nifty has registered the steepest fall in its history and fell a whopping 40 per cent from its high, in just 45 trading sessions. However, one needs to understand theoretically that any rise or fall does not happen in a straight line for a longer period of time. It takes some rest before continuing the trend and at some point of time; this resting will become a counter-trend rally. In the past bear markets, these counter trend rallies were retraced about 38.2 to 50 per cent of the prior downfall. If we believe that history repeats itself then, expect at least 38.2 per cent retracement of the downfall, which stands at around 9,390-9,400 levels. However, the level of 8,880 is an immediate hurdle.
