Traders Are Advised Caution With Long Positions As Bear Traps Loom Large
The bellwether index is approaching a critical junction, having made a strong recovery after skidding well below the lower Bollinger Band support level on the 20th this month.
In the past 45 days, the NIFTY has seen two failed attempts to break past the 20 DMA level, on 15th November and 13th December, respectively. If we witness a third failed attempt this week, we may well see the 50-share index cracking below the psychologically important 16K mark in the next down-wave.
On the weekly charts too, the index will meet stiff resistance around the 17,400 mark – which is the 20-week moving average. A pullback from these levels will strongly signal the start of a longer bearish wave; one that may well shave off the entire froth from equities over the coming weeks.
With fears of Omicron looming large, and the scourge of inflation playing spoilsport – we are most likely to see the brakes being put on equities as an asset class for the better part of 2022. There will be sharp pull back rallies from short covering that will trap unsuspecting investors into believing that the “worst is behind them”.
While the long-term story looks good, the short term will likely be fraught with volatility, panic, massive drops and sharp pullback rallies. A cool mind and disciplined accumulation with a 5 year plus horizon are going to be the two greatest weapons in the investor’s arsenal.
For now, think twice before taking long trading positions. We appear to have entered (at least for the short term), a “sell on highs” sort of market. This hypothesis will become a lot clearer once the last week of the year is through, and a breakout (or pullback) from the 20DMA has been logged.
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