Nifty panic selling & sharp recovery

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Nifty panic selling & sharp recovery seen after Trump Election & Modi’s action on Black Money is reminiscent of the price action we saw immediately after Brexit panic. This should incline us to consider this move positively. However there are many other red flags that require us to treat this move with a great degree of caution.

First, we note from one of our previous post that if we are in a bull run we don’t expect market to fall below 8294 & form an impulse pattern to the downside. Yesterday’s move has meant that we have actually broken below this level, but we did so on back of a major gap down opening. This gap down opening meant that there is a price zone where no trading happened during the fall, and hence we don’t have any price action to analyze and take a definitive call. In such a scenario we have to rely on the price action before & after the gap to classify the price move correctly. While the price move before the fall has a definitive corrective nature, the magnitude of the Trump Elect fall means this correction from the recent highs of 8966 is either:

  1. a wave (2) within the bigger wave 3 (an extremely bullish interpretation) or
  2. the entire move from February low till the highs of 8966 would need to be seen as correction (an extremely bearish interpretation)

The implications of both these interpretations are extremely divergent. Hence it would be imprudent to either get too bullish and load up the portfolio, or get too bearish and sell everything. Selectivity in stocks in such a scenario becomes extremely important. Having said that there is one reason why the interpretation 1 above seems less likely. This has to do with the general sentiment surrounding this rally. Ideally Big Wave 3s should be accompanied by widespread acknowledgement  & excitement of the bull market. This so far has been missing. In fact as outlined in our last post, it is difficult to predict the impact of the wholesale change to the economic system. But this change to the economic system has other social implications as well. This change has been received with exuberance from the general public, even if it has meant short term inconvenience to them. It underlines the public enthusiasm for change in the status quo, where the few rich & powerful derive most benefits from the system at expense of others. This again is not characteristic of a wave 3 sentiment. Hence, we are inclined to believe that the interpretation 2 above is a serious possibility.

The recent price action in Nifty is shown below:


As we outlined above we would treat this rally from yesterday’s low with skepticism. We think the level of 8737 can be difficult for the market to cross and taking some money off the table at this point will be prudent (specially since many stocks have recovered from the panic sell off). This cash can be deployed latter if we see Nifty crossing 8963 or if we see a bigger correction that may reverse all the gains since February. The upside in case of the former will be big, so much so that even if we miss this rally between 8600 to 8963 it would ultimately not amount to much in context of gains we may witness.  The correction from 8963 though has been pretty complex and this will continue to be the nature of this correction if further fall materializes.

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