Fear is an Opportunity on D-street

May 19, 2022

Brijesh Bhatia, Research analyst

The stock market has bounced back recently but there is still fear on Dalal Street.

How can you as a trader tell when the bottom is in place on the Nifty.

Well, in this video, I'll answer that question.

Let me know your thoughts in the comments.

Hello viewers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

Nifty has come back very, very strongly this week. If you look, we made a low of 15,735 back towards the level of around 16,400. Nearly we have tested 16,400 in today's session and this recovery has been very, very a convincing move.

Considering the fear on the street is very, very important that the momentum turns back towards the positive side. But this fear is very, very extreme.

Let me show you the chart first. Look at this chart.

 

This is the monthly chart of the Nifty and if you look below, the panel over there, this is the fear and greed indicator.

Now, if we look at in the boxes marked, the fear has been very, very extreme. What we saw right in 2008-2009, where the markets fell, 2020 markets when markets fell, back in 2015-16 it was a similar fear, and back in 2022 May, we are witnessing a similar level of fear in D-street. And this fear is very important.

If you look at all the fears, the lows were marked when the fear was very, very extreme. Back in 2009, look at the lows. Back in 2015-16, look at the lows and then the rally. Back in 2020, we all know the pandemic hit and the V-shaped recovery. The market hit a low and a fast and furious rally happened.

Again back in to the 2022 in May, the fear is very, very extreme. But is this the bottom? Well, let's look at some of the charts and what are the risks if in case this is not the bottom, and what levels one should look at to mark this as bottom.

So let's look at the second chart. I'm using the top down approach, moving on from monthly to weekly charts. So this is the weekly chart on your screen over here.

 

Most importantly, this is the most convincing chart where I think this support is a good demand zone. 15,671 we made a low. 15,735 we made a higher low over here and again the higher lows are very, very crucial.

If you look at the blue line over there, back in 2021 we were resisting somewhere around 15,431. Still a few points here and here and there, 15,431 is acting as a good support zone.

If you look at the lower panel here on the RSI, it made in lower low, which is again a bullish hidden divergence over here where prices are not making a new low. But the RSI is making the new low, which is again bullish hidden diversion and the momentum is coming back very, very strongly, forming the higher low over here.

 

Similarly, if I look at the daily chart as well, the similar structure is happening. So with the weekly RSI, with the daily RSI, I both are showing positive divergence over here, The hidden divergence, and prices on forming a higher low, not breaking the previous swing low of 15,671. It's indicating a good support area.

Well, is this convincing to buy the Nifty and form the bottom? Let's look and one more chart The daily chart on your screen over here.

 

This is the bullish backed harmony. So harmonic patterns are basically calculated using the multiple Fibonacci numbers and they are reversal in nature.

If you look at the structure over here, till 15,671 is not breached, this pattern will continue to remain intact and it signs the bullish pattern. We made a low of 15,735-15,739 multiple times, came back very, very strongly back toward 16,300 plus levels in today's session, and the momentum is getting stronger and stronger.

Most importantly, if we look at yesterday's trading session, where the Nifty was up by more than 400 points, all the stocks into the Nifty 50 ended on a positive note, which is again, breath-wise, a good confirmation that the momentum is coming back.

Be the short covering rally in some of the stocks, be it the bullish momentum, but yes, all 50 stocks ended on a positive note. The breath is indicating the bullish tone coming onto the markets back again.

 

Now with the Harmonic if I add the directional movement indicator or the ADX, if you look at the chart over here, the below panel, again the same structure, the red line is negative direction indication, the blue line is positive and the black line is the ADX.

So this means that the ADX is moving higher which means the momentum is getting stronger and stronger. With the negative DI, which is stopping negative now, turning southwards, and the positive DI turning northwards, it indicates that yes, the bulls are getting an upper hand into the momentum.

Still, the positive crossover above the negative is yet to come. But as of now on the first glance, it indicates that the momentum is coming back into the bullish zone. With the ADX as well heading higher, it indicates bulls are getting stronger and stronger.

What could be the risk over here and what is the conformation that the bottom is in place? Let me show you one chart, which indicates that the risk is very, very high.

 

Now, if you look at this chart, when the fall started right from 17,400 back to the 15,750 levels, there are few gaps, and this gap, which I consider it is a tun away gap, this gap will act as a major resistance.

So it's 16,500-16,560 zone. Precisely it's 16,484-16,650. Till this hurdle is not crossed, I think still there is a cautious sign for bulls as of now though, this is a bounce.

If in case at this level, the hurdle is not crossed, this could break down and be termed as a dead cat bounce and we might see a lower level again.

Yes, 15,671 and 15,400 will play a crucial support now, but yes, for bulls to mark this as a bottom, for a short term, 16,650 should be taken out in a convincing way because this gap with play a huge resistance zone considering the runaway gap. We saw the gap down opening and the follow up selling very aggressively. So this can be termed as a runaway gap and runaway gaps marks huge resistances and support zones.

So for a short term point of view, if 16,484-16650 is not taken out, probably we might see a range bound to a negative bias into the coming weeks. And if that is taken off, we might see 17,300-17,500 levels again on the Nifty.

So yes, I think from a long-term perspective, from an investment perspective, you should accumulate this dip in stocks where you think that there is a huge opportunity and the fundamental stocks are very, very strong. Slow and steady accumulate those stocks.

I believe yes, though a short-term bottom is not in place but 15,400-15,600 will be a crucial support zone for Nifty in the future.

Signing off, Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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