How to trade the sell on the stock market

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In addition, geopolitical tensions between Russia and Ukraine, the rising dollar index and soaring oil prices and bond yields added to the woes.

Key indices Sensex and Nifty crashed around 3% today, nearly wiping out 10 tn wealth from investors.

Persistent bearish sentiment in Indian equity markets undermined investor confidence.

Bear markets are inevitable. It can be difficult to predict them, as well as their persistence and their impact on stock prices.

However, bear markets are an integral part of market cycles, so you can not only survive them, but also position yourself to take advantage of them.

But how?

To help, we reached out to Equitymaster Research Analyst Brijesh Bhatia for his views on the current market sell-off and how investors should play it.

Brijesh talks about various topics – sector indices, US bond yields, international markets, bitcoin, and more.

Read on for a very insightful interview…

Equitymaster – What’s your reading of the current sell-off in the stock markets? Where do you think it will end?

Brijesh – I view this selloff from 18,350 to 17,000 as a retracement of the recent 12% rally from 16,410 to 18,350.

Since hitting an all-time high of 18,604 in October 2021, the Nifty has been forming a lower pattern – lower which is bearish according to the Dow Theory.

The new year brought joy to the bulls with the change in trend. The Nifty broke its previous high of 17,639 and ended the bearish momentum.

The rally from 16,410 to 18,350 also trampled the bears with the bullish “three white soldiers” candlestick pattern on the weekly chart.

Three White Soldiers is a bullish candlestick pattern consisting of three consecutive long-body candles. It is used to predict the reversal of the current downtrend in a price chart.

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Clever.

The reversal from 16,410 occurred like the pattern we witnessed in April 2021. The index is reversing after a retracement of over 61.80% Fibonacci retracement.

Likewise, the recent dip broke above the 61.80% Fibonacci retracement that was at 17,150 to take support at the key psychological level of 17,000.

The icing on the cake is that the Nifty has been outperforming the Dow Jones since the start of 2022. This highlights the strength of the Nifty’s bullish momentum.

The drop to 17,000 looks promising for the bulls ahead of the Union budget.

As we are in the monthly expiry week, volatility will continue to be higher.

Equitymaster – Of the various sector and broader market indices, which do you think are the weakest charts and which do you think will hold up well?

Brijesh – Buy stocks that are above their long-term averages and avoid those that are below.

The 200-day moving average is considered the long-term average in technical analysis.

FMCG and Pharma are the two sectors that are below the 200DMA and are the weakest charts among all sector indices.

While we’re talking about the Nifty, the sectors that can outperform it are banking and finance, energy, and autos.

Banking & Finance holds the highest weighting of 34% in the Nifty while energy and autos constitute 12% and 3.4% respectively.

Equitymaster – We know you won’t make any recommendations. But are there any stocks you are watching closely for possible long/short recommendations in the near future?

Brijesh – There are few sectors that I am watching closely before the Union budget. These are banks, real estate and infrastructure.

Taking a trip down memory lane, Bank Nifty rose around 18% last year during Union Budget Week 2021. Can history repeat itself?

The technical setup looks promising for the bulls as the ratios chart indicates an outperformance of the Bank Nifty against the Nifty50.

Nifty Bank versus Nifty.

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Nifty Bank versus Nifty.

The price decline between October 2021 and December 2021 indicates an underperformance of Bank Nifty against Nifty50. The January 2022 rally, triggered by Bank Nifty, forms the basis for the breakout.

The bullish or inverted Inverted Head and Shoulders (IH&S) pattern on the ratios chart indicates that Bank Nifty’s outperformance will continue as we enter February.

When it comes to stocks, ICICI Bank and HDFC Bank are my top picks in the banking basket.

The Realty & Infra sector emerged from the consolidation of the decade. I believe that Realty & Infra can be the sectors of the year.

The recent market decline is a great opportunity to accumulate stocks in these sectors.

Equitymaster – How are the international indices evolving? The Nasdaq 100 for example?

Brijesh – The recent selloff in global markets was driven by the rise in the US 10-year bond yield from 1.35% to 1.90% in a month.

The Nasdaq corrected 13% in the past 3 weeks from 16,500 to 14,500 levels. The bullish reversal pattern is forming in the 13,750-13,900 area.

relative strength index (RSI) on the daily chart is at 2020 levels. Back then, we saw a V-shaped recovery from oversold levels. History is likely to repeat itself in 2022.

Equitymaster – Market sentiment appears to have turned just as bad at the start of 2020. How do you see it evolving in the weeks and months ahead?

Brijesh – The market never moves in a straight line and this is where volatility comes in.

The upward trend in equities will continue over the long term. The recent volatility is due to an opportunity in other asset classes.

US 10-year bond yields are up and commodities are also booming.

The S&P Goldman Sachs Commodity Index and the Thomson Reuters Commodity CRB Index are ending a 13-year bear cycle.

I believe this is the instinctive reaction of stocks and this decline is an accumulation opportunity.

Nifty is likely to head towards the 18,216-18,384 levels in the coming weeks.

Equitymaster – What is your message for traders?

Brijesh – Traders had a gala in 2020 and 2021 where you buy and hold for a few days, it ends up paying you more than expected.

2022 is different…

Volatility is expected to stay longer in 2022 compared to the 27-day average volatility in 2021.

Traders should be on their toes for a quick entry and exit as volatility can hit them hard.

I would suggest traders to trade with strict stop losses to stay in the game.

Equitymaster – One last question… what do you think of Bitcoin? Crypto has sold off sharply…

Brijesh – Asset class rotation is the strategy to make money and it is happening in global markets right now.

The Dow Jones has corrected, the US 10-year bond yield is rising, commodity prices are rising and the dollar index is approaching 96. These are the assets where traders are exploring opportunities.

Recently, the US Small Cap Russell 2000 Index saw a strong sell-off following the profit booking and crypto correction. This indicates that high risk instruments are not on the table.

Money moves from high-risk assets to low-risk assets.

I expect to Bitcoin consolidate for a few weeks in the $30,000-$40,000 range before resuming its uptrend.

Traders can rack up declines up to $30,000 for a 2-4 month outlook. As this is a very volatile asset class, only invest what you can afford to lose.

Good investment!

(This article is syndicated from equitymaster.com)

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