Last Updated on Jun 27, 2022 by Aradhana Gotur
This article is authored by Hitesh Eidnani, founder of HBE Capital Investments LLP, an Investment Research firm (https://www.hbecapital.net/). Hitesh is an alumnus of BITS Pilani with an MBA from IIM Calcutta. He designs trading systems and has over 20 yrs of experience in investing across various assets and timeframes.
A lot has been happening in the markets lately. Inflation is the ugly word, and rate hikes have spooked the market. The war has not yet finished, and crude oil is firmly up. Let us analyse the charts of key assets to understand the current trend and what lies ahead in the future.
Table of Contents
Nifty trend bearish
First, let us look at the Nifty chart. The 3-line break chart of Nifty on the hourly timeframe is the best to understand the intermediate direction. It is noiseless and does not produce too many whipsaws in sideways markets. See the last 3 months – only 2-3 clear signals. It is currently bearish, having turned down at 16,300. Before this, it had given a bullish signal at 16,060 in the third week of May. That worked well with Nifty moving 500-600 points upwards. How low will the markets go? It is very difficult to predict – it might fall 1,000 points or turn around from here. We will keep a bearish bias till we get a bullish signal on this chart.
Stocks vs Bonds: long-term trend now favours bonds over stocks
The Stocks vs Bonds ratio shows which asset is currently in favour. It is a very good long-term signal and shows where the Big Money ( institutional investors) are currently allocating their money. Stocks and Bonds are negatively correlated, which means when one rises, the other falls and vice versa. It has given a negative crossover on the MACD monthly chart.
This shows stocks might be bearish/sideways going forwards, and bonds would be preferred over stocks by the big players. While this might sound surprising as yields have been heading up, this is on a relative basis. So between stocks and bonds, the big players will choose bonds. It is possible that both stocks and bonds fall for some time before one starts rising.
SP500: Downtrend to intensify?
The SP500 has been in a downtrend for a few months. See the monthly chart of the SP500 with the MACD (Moving Average Convergence Divergence) and KST (Know Sure Thing) indicators. These indicators on the monthly chart are very good at spotting long-term trend changes. The red vertical line shows a bearish crossover. See how in the past, these negative crossovers have led to the SP500 falling or going sidewards. There is a high probability that they will do the same in the near future.
We will look at bullish probabilities again in the SP500 once we get a positive crossover. Till then, any level on the downside is possible.
Nasdaq: Brutal bear market takes a tighter grip
Nasdaq is clearly in a downtrend. This chart shows the Nasdaq with the weekly Bollinger Bands. Once it captures the middle line, we can talk about bullish probabilities. Till then, let’s follow the bears.
This chart shows the extent of the damage. Nasdaq percentage of stocks above 150 Day Moving Average (DMA) is close to 10. The selloff has been brutal. 40% of stocks in the Nasdaq Composite are down 50% or worse from their 52-week highs. Nearly 1 in 5 stocks out of 4,800 total are down 80% or worse from their 52-week high.
Gold: Not given a hedge till now
Gold has also been bearish. Surprisingly as usually, Gold is a good hedge against equities. A strong rising US Dollar is the culprit. It is possible that if equities fall more, Gold will start climbing up. But till it indicates that on the chart, it is bearish.
Crypto: Bitcoin has broken down – lower levels possible
Bitcoin has been bearish for a few months, as shown by the monthly negative crossovers in the MACD and KST charts. It has broken key support levels. There are talks of various crypto funding exchanges like Celsius pausing withdrawals. Even Binance has temporarily paused Bitcoin withdrawals on some networks. This sounds like the perfect storm. The selloff is intensifying, and it could head a lot lower.