Nifty Index about to witness Quarterly Bearish Engulfing

30 Des 2024

4 and a half years from April 2020, it has been a euphoric ride for India's Nifty and Sensex.

If prices remain more or less unchanged by New Year's Eve, we're about to witness a once in 5 year event on the charts. A "quarterly bearish engulfing" at all time highs. In simpler terms, quarterly prices closing below the lowest price of previous quarter.

What has happened in the past when this happened?
This happened last in 2020 (the deep red pandemic candle) - where 15 quarters or nearly 4 years of gain was wiped out in a single quarter.
Before that, it happened in 2015 - where it took 3 quarters to wipe out 4 quarters or 1 year worth of gain. (Indicating more of a systemic sell-off, than a knee-jerk news based panic. Something similar is happening now, after a long long time.)

2015, then 2020, and now 2024-25. For those who understand time cycles in nature and its inevitable influence on our nature, and thus the markets, you'd appreciate this is no co-incidence.

There is no reason to panic, as this, just like any other event, presents an opportunity to grow wealth.

Before you read further, I intend to keep this idea beginner friendly on how to potentially benefit from this opportunity. It can form a base for you to navigate your personal finance journey further. Intermediate and advanced traders/investors may benefit from my other (future) posts. Kindly note that this published note is only my opinion, solely for educational purposes, and not investment advice.

Through the remainder of this piece, I will waltz you through the most probable outcomes and the possible decisions one may take, all assuming that you're relatively new to witnessing a systematic sell-offs.

Understanding the logic of a bearish engulfing pattern:
First - What a bearish engulfing candlestick pattern on a quarterly time frame means is that
for 1 whole quarter, there was a net gain (July-Sept2024 = +7.5%) and the lowest price was 23893.7; whilst immediately for next 1 whole quarter (Oct- 30Dec2024 = -8.49%) we can see a net loss. Not only do we see a net loss, but also most importantly, we see quarter price "closing" lower than the "lowest" price of previous quarter. This is powerful information as it indicates that buyers have "failed to remain in strength" even at the lowest price of the previous quarter (Understand that the lowest price of previous quarter is where the buyers were the most powerful in that quarter, that is why it was the "lowest" price of that quarter because the price went up from there). For reference, see the feature image of this post again.

What does this mean for the next few weeks/months/quarters: (The most probably outcomes)
1) Normally, a bearish engulfing pattern at the top of the charts indicates end of an existing up-trend. When this happens in a higher time frame (weekly/monthly/quarterly), it is more reliable.
2) End of an existing up-trend indicates beginning of a new opposite trend. An opposite trend can either be sideways or downside. This depends on further reaction from market forces in the coming days. We can see that after the pandemic quarterly crash, we had no opposite trend, in fact, there was an immediate rebound. This was an exception as pandemic market crash was a 1 time panic-led sell-off rather than a systemic sell off (which is more sustainable time-wise).
3) We are highly likely in a systemic sell off now, if this quarter's low is taken out in January. This is the highest likely scenario after a 4.5 years of euphoric uptrend in the market.

How to benefit in the following weeks/months:

• The simplest way with minimal to moderate time investment, is to begin SIP in fundamentally strong "value" stocks, or the index itself, or both - in a "pyramid" fashion.
  Once you select the stocks, pyramiding your investment amount - that is, starting small at current levels and scaling up your investment as you get better prices when Nifty (or your cherry picked stocks) fall further.
  A simple way to apply it is to buy whenever price is near the Moving Averages (MA) of 55 weeks, 89 weeks and 233 weeks - as the index continues in a down trend in the following weeks/months. You can plot these on Tradingview with ease. Remember to plot on weekly time frame. Buy lower multiples at 55 MA, higher at 89 MA and even higher at 233 MA.
  
  This is a simple, more optimised way of buying the index fund which can help you get higher ROI as compared to someone making SIP on a fixed date every month. This is because your average buy price will be lower than someone buying the same quantity at random prices every month.

• Yet another way is to learn the skill of selling index call options by hedging them. Even though this is a slightly advance way of generating extra income, it is great to learn in downtrending markets - as you will be able to generate profits from a decline in the price of index (remember it is a lot more difficult to generate profits from individual stocks and investments in a broader down-trending market). A realistic expectation for beginners can be making 1-3% a month with this technique (average annualised) - thus helping offset the loss in the existing stocks/MF portfolio.

• If this sounds difficult, yet another way is assessing the hygiene of your portfolio and rejig the holdings if needed. Without proper knowledge, it is best to let a qualified financial advisor/expert review your holdings/portfolio and see if they want to re-shuffle the portfolio. This could even mean reducing exposure to equity for a period of 1 year, and increase exposure to debt funds or other fixed income avenues, or simply sitting on some % cash to buy at a later, better value. Whilst this sounds too much work, remember that a mere 4-5% extra gain for the entire year, every year, compounds to a large number over the years. So entrusting a reliable financial advisor to do this could be worth your time and resources. Now is a good time to do that.

Disclaimer:

This is my personal opinion and is only for educational purposes. Please consult your financial advisor before making any decision. Stock Market investments are subject to market risk. Past performances are no guarantee of future returns.
This content above is solely for educational purposes only and to provide information and is not intended to give any advice. Information shared is personal opinions only. Wherever any stock or mutual fund name is mentioned, this is only for educational and informational purposes. Share market and investment can be risky, please take professional advice before making any decision.