Published on: March 13, 2024
In technical analysis, the mere mention of a “stock market crash” sends ripples of apprehension to traders and investors alike. While market rallies may imbue optimism and confidence, the spectre of a downturn looms ever-present, demanding attention and preparation.
It’s a curious phenomenon of human psychology that negativity often garners more attention than positivity. In the trading world, this is particularly evident when discussing the possibility of a market crash. Despite the allure of bullish trends and record-breaking highs, mentioning a downturn captures the imagination and stirs the senses. Following a substantial 20% rally in stock prices, the allure of further gains may seem irresistible to some.
Indeed, the internet and social media platforms buzz with speculation and conjecture on the stock market crash whenever the Nifty experiences a modest dip of 200-300 points.
But more than a buzz, what does the chart highlights?
Nifty Daily Chart
Source: TradePoint
Turning our attention to the daily chart of the Nifty index, we observe several critical developments that warrant careful consideration. The index has recently breached a critical resistance zone, as indicated by the conspicuous red box on the chart. This breakout initially signals strength and bullish momentum in the market, propelling the Nifty to new all-time highs.
However, a closer examination reveals subtle nuances that betray underlying weaknesses. Despite reaching record peaks, the Relative Strength Index (RSI), a popular momentum oscillator, fails to confirm the index’s highs. This divergence between price action and momentum signals a potential loss of bullish momentum, signalling a cautionary note for traders and investors alike.
Identifying key support and resistance levels in technical analysis is paramount for gauging market sentiment and anticipating potential price movements. For the Nifty index, the 50-day Exponential Moving Average (DEMA) serves as a crucial support level, having held firm since mid-November 2023.
Presently, the 50DEMA rests at approximately 21,838, with the previous swing low recorded at 21,860. These levels represent critical thresholds that delineate the boundaries of bullish and bearish sentiment. A breach below the 50DEMA, accompanied by sustained selling pressure, could signal a shift in market dynamics and pave the way for further downside.
Conversely, resistance-turned-support zones, such as the one recently tested by the Nifty, offer valuable insights into market psychology and sentiment. Monitoring price action around these levels provides traders with crucial information regarding the strength of bullish or bearish forces at play.
Midcap and SmallCap index has corrected by 4% and 5% respectively, can the Nifty50 follow up or witnessed an outperformance?
On weekend I have written an article on Large Caps – The Next Big Thing? You can click here to read the article.
In conclusion, while the possibility of a stock market crash may evoke fear and uncertainty, technical traders approach market volatility with a measured and strategic mindset. Traders can navigate turbulent market conditions confidently and resiliently by analysing key indicators, identifying critical support and resistance levels, and prioritising risk management. Remember, in the words of renowned technical analyst John Murphy, “The goal of technical analysis is not to predict what will happen. But to determine the probability of what will happen.”
Stay vigilant, stay prepared, and may the markets ever be in your favour.
