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Correction Or Consolidation?

Going to be a small post this. The markets have been showing weakness for past several weeks, 12 weeks to be precise. The weakness is being interpreted in different ways by the market participants, mostly being bearish. But is the market setup really bearish?

With Covid second wave ravaging through the country, lock-downs are being imposed again. In March 2020, the market fell before the lock-down was announced and started to recover soon after the lock-down was started. Going by that, the market should have unwinded significantly this time since the devastation of Covid is simply incomparable to the first wave. But no, market has been dragging its feet on the weakness. Take a look at the Nifty Daily chart below.

Nifty May 02 2021 Daily Chart
Nifty May 02 2021 Daily Chart

The market has come a long way since March 2020. For a moment, forget how crazy this rally is and how it has met all the criteria of a bubble, instead look more on the chart setup. The market took a turn after hitting the 1.618 Fib Retracement level of the entire rally and has been hovering between 1.618 & 1.414 Fib levels. Though Nifty is making lower low and lower high, the bearish setup of past 12 weeks is nothing compared to the rally it has put behind. When seen on the larger picture, this is more of a consolidation, instead of a correction, a flag pattern as the technical analysts call it. A flag on the candlestick chart is a bullish setup, where the price is taking a breather (or waiting for favourable news flow) to move the direction of the prevailing trend. The market started off every monday in deep red in April, except last week. But it ended Friday in red. This could be due to risk-off trade due to the state election results that were due on May 2, 2021.

So why haven't the index crashed when Covid cases are hitting 4 lakh/day? The reason is simple, markets as forward looking as ever, are expecting a control in the infection curve with lock-downs being imposed. The tapering of cases in Mumbai is an example, and it already had a reaction on the market last week, where it jumped 600 pts in no time. So, why isn't it bothered about the economic disruption caused by the second wave? May be because they are not that forward looking either. Remember, this is a market that is running on steroids, it wants to run the 100 meter sprint, not a marathon. The economy is the least of it's concern due to the excess speculation among the participants. But it will take favourable economic indicators in it's stride to do what it has done so far.

Eventually, the Covid cases will top out, followed by an opening up of the economy. Don't expect a phase 1-2-3 type open-up, it would be a quick back-to-normal re-open with vaccines now being generally accepted by the population. Along with it, the markets too would be eager to cover the lost bullish ground. Backed by companies reporting superb results on the back of a lower base of 2020, with consumption and sales picking up, its the perfect storm for the markets to rally.

It would be interesting to see what it does to those investors who had missed the ride, sitting and watching others going on a joy ride. For now, the hot-air balloons are getting pumped. It probably depends on whether they give-in to FOMO and jump straight-in or keep their sanity. And this would decide if it is is going to be just another rally or THE euphoric rally. I am betting on the Euphoric rally as a spectator. If you are taking the ride, make sure you enjoy it! What comes after, might not be pretty.

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