SwingTrader’s take on the Indian Stock Market

Another down day for NIFTY. 4% of NSE stocks are now at monthly highs and 32% are at monthly lows. So the situation is fast approaching oversold condition from where an intermediate term rally can emerge. To give you a perspective of how oversold it can get, here are the levels to which monthly lows had dropped on previous pullbacks/corrections:

NIFTY had a down day much in line with the market internals. The percentage of stocks at monthly highs is currently around 7% and stocks monthly lows is around 27%. It is very important to follow this pullback closely and see how far it will go and how the price reacts around the price 2927 (the previous high) which is the main support at the moment.There is another chart that I keep an eye on that cautions me about coming corrections/pullbacks – NSE Overbought – Oversold Stocks. This is a running sum of net overbought minus oversold stocks on NSE. Usually this line diverges from NIFTY just before corrections/pullbacks. Currently it has diverged too. I have marked the current & previous divergences on the chart:

NIFTY had an up day today but volume was low. The negative pattern of missing broad support for the recent rally continues today with many more stocks falling to new lows. At the moment around 7% NSE stocks are at monthly highs whereas around 18% NSE stocks are at monthly lows whereas when the recent rally started (on 19/01/2006) 10% stocks were are monthly highs and 4% stocks were at monthly lows. So as NIFTY rallied, more stocks have fallen to monthly lows and very few have gone up to monthly highs. This is a negative for sure, something which had not happened during previous rallies out of pullbacks.One thing I would like to clarify is that my analysis has nothing to do with my trading. Just because I keep seeing negative patterns/divergences in the market (vs market breadth etc) I DO NOT stop trading or go short. I never ever let my analysis dictate how I position myself in the market. The analysis just acts as caution. I trade based on price and price alone, nothing else. The negative divergences have to be confirmed by the index price otherwise it doesn’t matter. I trade in the direction of trend, this is my primary indicator. Everything else is secondary.

NIFTY gapped up on open to new highs and then moved sideways to down for the rest of the day. Declines were almost three times the advances on NSE. Down volume was more than twice the up volume. So it was a broad sell off even though NIFTY hit new highs. The advance-decline doesn’t look good, it has been going sideways to down since Oct 2005 which is a non-confirmation of NIFTY highs. My other market sentiment charts too are showing broad sell off today with huge pressure on the sell side. All this could mean stealth distribution going on in the markets. Correction is due but when? Only time will tell…

Analysis

I am glad my analysis was proved wrong and NIFTY followed thru’ strongly after the breakout yesterday. NSE market participation chart I showed yesterday now looks a lot better with broad market support showing up on today’s move. Now looking for a consolidation above the previous NIFTY high of 2927 and further swings up. Let us see what happens…

Picks

NATIONALUM – Breakout
I-FLEX – Breakout
GLAXO – Breakout
IGL – Moving out of pullback
CUMMINSIND – Huge breakout (but could be a bit extended at the moment)

Breakout out day on NIFTY. I am not too impressed with this particular breakout. As I have been highlighting this recently, broad support is missing for this move out of the pullback. I am posting current NSE TRIN, Monthly New Highs – New Lows & Market Participation charts, the divergence is clearly visible on market participation charts whereas the New Monthly Lows are increasing even though New Monthly Highs are holding their ground which is slightly encouraging.

Market Participation is missing which indicates the current upmove doesn’t have broad market support. On the chart I have indicated how the negative pull on a move out of pullback was low and and at the same positive pull was high. On the current move positive pull is very low whereas negative pull is high.

Monthly New Highs – New Lows chart shows rising monthly new lows. The positive here is monthly new highs are holding their ground.

I am keeping my fingers crossed as all this could just point to a sideways move and does not necessarily indicate a possible down move. But when I see such signals I usually tighten my stops, lighten my positions, don’t take on too many at this time.

Only breakouts again today. The charts for pullback picks look ordinary, I don’t like any of those.

The thing that is worrying is the rising TRIN (I actually monitor moving averages of TRIN) which means significant systematic selling is going on. The rising TRIN doesn’t mean the market will fall, it could either fall or just consolidate in a sideways trend for few days before breaking out. The stocks hitting monthly highs are quite high but the volume factor is missing.

The NSE market participation chart also says a similar story. There was good overall market support for the first day’s move out of pullback but after that the support has flattered. All this could just point to consolidation in the near term or a down move, only time will tell.

A complete drying down of the retracements trading picks seems to be another indicator pointing to a consolidation or down move in the near term. There were many picks in today’s scan but the charts looked bad – very deep or sideways pullbacks. I rather not put the picks here.

A down day today for the market on decreased volume. This pullback has a distinctly different feel to it than the previous pullbacks. There is some hesitation in this case which is absent in the previous pullbacks. The market internals are diverging too with the monthly New Highs – New Lows chart indicating a slight drop in the monthly highs and a significant increase in the monthly lows. This is generally not a problem on a down day but the NSE market participation also indicates sudden declining support of the broad market behind the recent pullback. Still keeping my fingers crossed and waiting for the trading range to be resolved (see chart below).

AnalysisNice followthru’ day to previous trading day’s move. Nothing much to say about today’s move, the reaction of indicies around the recent highs will decide what is going to happen – a breakout/consolidation/down move.

Picks

My scans have not turned up anything – zero picks for Monday. It is understandable when you look at the sort of moves that various stocks have made in the past two trading days. Find oversold stocks in an uptrend is difficult after such a move. One sideways or a down day would give few picks. There are few moderately interesting stocks that look ok but I don’t want to list such stocks. I prefer to wait for better setups.

Links

Trader Mike’s website has good articles about trading, you will have to search the website for the articles. There are lots of hidden gems here. Make sure you read his writings on position sizing, expectancy, scaling out of trades etc. His “QuickLinks” section lists many interesting links (new links added everyday). Though the website talks mostly about US stocks there is a ton of general trading info here.