How to Trade the Stock Market Sell Off...

The domestic market bloodshed was fueled by increasing US treasury rates ahead of the US Fed's planned meeting. The earlier-than-expected policy rate move to tighten inflationary pressures in the US frightened markets throughout the world.

Besides, geo-political tensions between Russia and Ukrain, rising dollar index, and surging oil prices and bond yield added to the woes.

Key indices Sensex and Nifty crashed by around 3% today wiping out nearly Rs 10 tn of investors' wealth.

The ongoing bearish sentiment in the Indian share markets has dampened investors' confidence.

Bear markets are unavoidable. It can be difficult to predict them, as well as how long they will persist and how much they will affect stock prices.

However, bear markets are a normal part of market cycles, so you may not only survive them but also position yourself to profit from them.

But how?

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

Brijesh talks about various topics - sectoral indices, US bond yield, international markets, bitcoins etc.

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 stop?

Brijesh - I look at this sell-off from 18,350 to 17,000 as a retracement of the recent 12% rally from 16,410 to 18,350.

Since it hit all-time high of 18,604 in October 2021, the Nifty was forming a lower high - lower low structure which is bearish as per Dow theory.

The new year brought cheer to the bulls with the trend change. 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 "three white soldiers" bullish candlestick pattern on the weekly chart.

Three white soldiers is a bullish candlestick pattern that consists of three consecutive long-bodied candles. It's used to predict the reversal of the current downtrend in a pricing chart.

Nifty Daily Chart

 

The reversal from 16,410 just happened like the structure we witnessed in April 2021. Index reverse after retracing by over 61.80% Fibonacci retracement.

Similarly, the recent fall went over the 61.80% Fibonacci retracement which was at 17,150 to take support at the key psychological level of 17,000.

The icing on the cake is that the Nifty outperforming against the Dow Jones since the start of 2022. This highlights the strength in bullish momentum of the Nifty.

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

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

Equitymaster - Among the various sectoral and broader market indices, which do you think are the weakest charts and which do you think will hold up well?

Brijesh - Buy the stocks which are above their long-term averages and avoid the ones below it.

The 200 Days Moving Average is considered as the long-term average in technical analysis.

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

As we are talking about the Nifty, the sectors that can outperform it are banking & finance, energy, and auto.

Banking & Finance holds the highest weightage of 34% in the Nifty while energy and auto constitutes 12% and 3.4% respectively.

I did a video couple of weeks back on the Auto Index.

Equitymaster - We know you will not be making any recommendations. But any stocks that you are tracking closely for possible long/short recommendations in the near future?

Brijesh - There are few sectors which I am closely tracking ahead of Union Budget. They are Banks, Realty, and Infra.

Taking a trip down to memory lane, the Bank Nifty rallied about 18% last year during the Union Budget week in 2021. Can history repeat itself?

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

Bank Nifty to Nifty50 Ratio Chart

 

The falling price between October 2021 to December 2021 indicates under performance of Bank Nifty over Nifty50. The rally in January 2022, triggered by Bank Nifty forms the base for the breakout.

Bullish or Inverted Head and Shoulder (IH&S) pattern on the ratio chart indicates the outperformance of Bank Nifty will continue as we step into February.

As far as stocks are concerned, ICICI Bank and HDFC Bank are my top picks in the banking basket.

Realty & Infra sector has broken out of decade consolidation. I believe Realty & Infra can be the Sectors of the Year. Watch my video on these sectors for more.

The recent dip in the market is an excellent opportunity to accumulate the stocks from these sectors.

Equitymaster - How are the international indices looking? The Nasdaq 100 for instance?

Brijesh - The recent sell-off in the global markets are due to the rising US 10-year bond yield which has risen from 1.35% to 1.90% in a month.

Nasdaq has corrected by 13% in last 3-weeks from 16,500 to 14,500 levels. The bullish reversal structure is forming in the range of 13,750-13,900 zone.

Relative Strength Index (RSI) on the daily chart is at the levels of 2020. Back then, we saw a V-shaped recovery from oversold levels. History is likely to repeat again in 2022.

Equitymaster - The market sentiment seems to have become as bad in early 2020. How do you see it playing out in the coming weeks and months?

Brijesh - Market never moves in straight line and that is where volatility comes into play.

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

The US 10-year bond yield is rising and commodities are also breaking out.

The S&P Goldman Sachs Commodity Index and Thomson Reuters Commodity CRB Index are ending a 13 years bearish cycle.

I believe this is the knee jerk reaction in equities and this dip is an opportunity to accumulate.

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

Equitymaster - What's your message for traders?

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

2022 is different...

Volatility is likely to stay for a longer period in 2022 compared to the average volatility of 27 days in 2021.

Traders need to be on their toes for quick entry and exits as the volatility can hit them badly.

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

Equitymaster - One final question...what's your take on Bitcoin? The crypto has sold off sharply...

Brijesh - Asset class rotation is the strategy to make money and that's what happening in the global markets right now.

Dow Jones 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 Russell 2000 US smallcap index witnessed a sharp sell-off on the back of profit booking and the correction in cryptos. This indicates high-risk instruments are off the table.

Money is moving from high-risk assets to low-risk assets.

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

Traders can accumulate on dips to US$30,000 for a 2-4-month perspective. As this is a highly volatile asset class, invest only what you can afford to lose.

Happy Investing!