Markets: Technical findings!

A surge in covid cases and localized lockdowns has dented market sentiments over the last few weeks in the fear of delay in economic recovery; Frontline Indices are down ~8% from their peak.
A lot of people are relating this time to March’20 and trying to extrapolate the future market movement. Frequent questions like – Will there be a deep correction like the one we saw last year? Should we invest now or wait more for the market to correct are being asked!

We believe that a correction similar to one seen in March last year is unlikely but a healthy correction cannot be ruled out.

The current bull run has been phenomenal with enormous wealth creation in the last one year. With economy on the verge of recovery (Covid would just derail it) and various pockets of the markets like cyclicals, commodities beginning their new upcycle, the current bull run could be more powerful than the one seen in 2003-07 rally.

So, given the current correction, we thought of bringing to you all some interesting technical findings.

1) Markets do not move in a linear fashion – Even a bull market is characterized by decent corrections. But, if one looks at the Monthly chart of Nifty, he/she would acknowledge that there hasn’t been a single retracement of the whole rally – 7526 to 15524 (Nifty futures number).

2) A pullback after a breakout – Be it a Stock or and Index, a pullback after breaking out of a previous all time high (ATH) level or any resistance level has a high probability in Technical Analysis. Before last year’s correction, Nifty’s ATH level was 12419.20, achieved in the month of January, 2020. It finally broke this level in November, 2020. Still, the re-test to the previous ATH level hasn’t had happened.

3) If one looks at historical data, the previous two breakouts in Nifty monthly chart has been followed by a pullback, although it took considerable time for the market to re-test the level. So, there is a high possibility that the market could re-test the recent breakout level too, but no one knows when!!

4) In past instances where the index has almost doubled or more from its lowest point, there has been a minimum of 38.2% retracement of the overall move. If that were to happen this time, the 38.2 % level comes out to around 12500, which is close to the previous breakout level of 12419.20.

Given the current situation in our country and based on the technical findings, some more correction cannot be ruled out.

So, what should one do in the current market scenario?

Our advice to people who are investing via mutual funds is – continue with your SIPs and do not get worried about the index correction. It will benefit you from dollar cost averaging. For direct equity investors, you will always find value in individual stocks irrespective of the market levels. It’s just that the search cost in finding that stock will be immense and would need time and effort. This is the right time to stick with defensive names such as Pharma, FMCG and then reallocate your portfolio later based on the economic situation.

Please let us know your thoughts on this article in the comments section.

We’ll come up with more interesting topics in due course of time. Till then Stay Safe and Be Indoors!!

Disclaimer: The above are just our findings and please do not consider it as any sort of recommendation for investment purpose.

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