Nifty from levels of 10490 has come down to 10040 levels and suddenly you can sense mild fear among bulls. Whenever market pulls back, there is always this question of how deep the pullback will be and what IF this is different. Now there is an easy way to deal with it: Do nothing. This too will pass 🙂 It works for investors but not for traders.
Now: First question - Why has Nifty pulled back?
There has been pullback in Emerging market in last two weeks - About 5.6%. Nifty on other hand peaked on Nov 07 2017 and since then is down 3.9%
Hence as long as there is a weakness in Emerging market - one can expect continued weakness in Indian market and it all depends on how deep the pullback will be in Emerging market. There are two schools of thought:
1. Shallow Pullback which ends right here right now
The argument is very simple: Emerging market broke out above 45.2-45.3 on monthly chart and hence on any pullback near 45-45.3- it will attract strong buying
2. Ordinary Pullback which can take it down to 50 week moving average.
Now, if you remember - EEM took support at 50 week moving average in Nov-Dec 2016 before making a big move up - and finally breaking out above 37. Very recently in July - it made a large candle move and hence its follow through base now can act as solid support which coincides with 50-week ma. If that happens, we are talking about correction of another 5%
Any Pullback below 50 week moving average will only result in dramatic panic in Short term. So, I don't want to even talk about it for now. As of now: there are two scenarios: 1. Correction ends here OR 2. Correction becomes deeper and we see Emerging market EEM correcting another 5%
Interestingly - Nifty also seems similarly positioned.
As you can see in the Nifty chart above: Nifty made intermittent new high above 9700 in July 2017 and then it sharply pulled back on August 11 2017 and took support at 9700. It took the support of that level again on 28th Sep 2017. Nifty then rallied to 10490 levels.
Now Nifty has pulled back and Nifty Bulls are standing at Moving average support and if it holds - that would be great but if weakness persists and it breaks - then one cannot rule out Nifty sliding all the way down to 200 day moving average which will also coincide with Aug 11 2017 and Sep 28 2017 low of 9700.
There are two factors at play here:
1. Emerging Market and what it does from here
2. Gujarat Election and how nervous market is
If the market pulls back to 9700 - it will be great buying opportunity in quality stocks. Now if for any reason - Nifty breaks down below 9700 - then it will be a different matter. How one can prepare itself for all scenarios: Liquidate low quality low liquid names because they get hammered beyond repair once market corrects. As far as quality names are concerned: All you can do: Hope and Pray that this too will pass 🙂
There is not much one can do right now except watch from sidelines. Please let me know what you think
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers