What Should Be The Strategy Of Investors For The Swinging Stock Market In Doubt?

The morning on which Russian President Vladimir Putin announced an attack on Ukraine, Indian stock markets were in turmoil throughout the day. Sensex and Nifty, both the stock market sensitive indices, fell 5-5%, which was the biggest fall for these indices in the last two years. If seen on the technical chart, this decline was a sign of a sell-off for the Nifty as the Nifty, despite closing at a decline of 114 points on February 22, after opening with support at the 200-day moving average, had risen above its lower support. It closed around 250 points above the level, which was also the level it opened that day.

The next day on February 23, the market opened up but had come down by 28 points by the time it closed. Despite this, it was well above the 200 DMA. But on 24th February, the day the attack on Ukraine was announced, Nifty opened down almost 500 points and went down for the whole day and finally closed down more than 800 points at 16248. In reference to the 200 DMA, it was down by around 650 points.

Technically, this was a sign of huge weakness in the market for the time being. But this signal collapsed in the very next trading session when the Nifty opened with a gain of 250 points on February 25 and closed by 410 points by the end of trading. This uptrend continued on the next day i.e. February 28 as well. Although Nifty opened down about 170 points on that day, but the buyers dominated the sellers throughout the session and finally by the time the market closed, there was a gain of 135 points. That is, in just two sessions, the Nifty has increased by about 600 points from its low level of 16203.

So is the danger averted?

This is the biggest question facing investors. Instead of looking for a direct answer to this question, it is better to look at the fundamentals facing the market and understand it by combining it with the technical patterns formed last week. The Sensitive Index of the stock market is still well below the 200 DMA which is 16913, despite the rise of Friday and Monday, which came after Thursday’s heavy fall last week. For a correction in the market, it is very important that Nifty closes above 200 DMA. But looking at the market fundamentals, it doesn’t look like the markets have left all worries behind for the time being. These include both short and medium term concerns.

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In the short term, the ongoing Russian attack in Ukraine is the biggest concern and although the panic that was seen in the market on the first day of the attack has now disappeared, but the attack is still going on. Western countries under the leadership of America are imposing new economic and social sanctions on Russia, but it is too early to say where these attacks and sanctions will stop. It is certain that Russia’s attack will not stop before a conclusive result and the pressure on Western countries to tighten sanctions will continue to grow. But there is also the downside that there is no substitute for Russian heating oil for Western countries, so many experts believe that Western sanctions will not be too harsh, despite all the word of mouth.

In such a situation, every small and big news related to attacks and sanctions will continue to create a stir in the stock market. If the sanctions were to really affect the global economy, there would be a sell-off in the stock market, otherwise the markets could stabilize at current levels.

increasing pressure on crude

Crude oil is already under pressure and Brent crude has once again crossed $100 per barrel. But it would not be right to look at the coming increase in crude oil only from the point of view of the increasing burden on the Indian economy and the exchequer. Along with the country, it will have a huge impact on the inflation rate in America. America is already reeling from rising inflation and the inflation rate there has crossed 7% back after 40 years.

As a result, the US Fed has decided to put the brakes on its bond buying plan to reduce liquidity. As of November, the Fed was buying $120 billion in bonds a month, which it decided to reduce by $15 billion a month. That is, by July, bond buying was to be completely stopped. After that it was likely that interest rates would start rising gradually.

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But when retail inflation for urban consumers in the US hit 6.8% in November 2021, US Federal Bank was in a tizzy. Prior to this, exactly 40 years ago, in June 1982, retail inflation in the US had reached this level (7.1%). The Fed revised its old plan and doubled its bond purchase cuts to $30 billion a month.

That is, by March 2022, the Federal Reserve’s bond purchases will stop completely. The Fed has also made it clear that it can raise interest rates 3-4 times during 2022 and it will start from March. Although many people believe that this deduction can be done up to 6 times. In such a situation, if the US Fed starts work on reducing liquidity in other ways due to crude oil, then its effect can come in the form of a severe sell-off in the Indian stock markets.

Nasdaq created death cross formation

Technicals have become completely bearish in the US markets as well. On February 18, the Nasdaq made a ‘death cross’ formation for the first time since April 2020, which, on a technical level, often indicates a heavy sell-off in the coming days. A death cross is when the 50-DMA of a chart crosses below its 200-DMA. In Nifty also since January 6, the 50-DMA is moving below the 100-DMA of the chart, but it is still well above the 200-DMA. Death formations on the Nasdaq were also formed in June 2000 and January 2008, after which there was a catastrophic sell-off.

However, there is another aspect to this formation as well. According to a study by Potomac Fund Management, this formation has happened 31 times since 1971, but the index has touched a new high six months later in 77% of the cases. April 2020 is also a similar example, when this formation was seen after a fall.

The conclusion is that the stock markets are in the grip of complete uncertainty. In such a situation, there are only two types of strategy for investors or traders. Either invest in high quality stocks with a target of 3-5 years. Or invest money at the time of downside in good stocks for a very short period with a tight stoploss and if you get 5-7% profit, then book profit. This strategy seems to be most effective in such a market.

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