Priortize capital preservation in view of likely market downturn

Following the past six months, the equity market is showing an unstable and risky pattern. From the month of June 2024, every month is recording a significant price dip in the headline indices. After these dips, the prices of the indices do recover but not much. It only gives relief for a short time indicating a weak and unconvincing recovery.

Effects of stop loss levels
Traders usually keep stop loss while trading on their investments. In this scenario, the stop loss levels put by traders has led to booking of losses by traders. The reason for this is once the stop loss is triggered, the sell orders are automatically executed leading to traders recording losses in transactions.

Further, the loss booked is not recovered because traders are reluctant to purchase the same stock again at a considerable higher price level. This is the reason why price levels of stocks which were supposed to recover observed a weak recovery. Also even if the price levels increase, the traders are not able to recover the losses due to being sceptical about buying again at a higher rate.

Broad picture of the stock market
The intensity of the fall in the headline indices is not the only reason for the stock market to be at risk. The other reason is due to high selling pressure from some Institutional traders and High Net Worth Individuals (HNIs) even at low price levels. This offloading of stocks at low price levels indicates that HNIs and institutional traders expect that stock prices will fall more in the future than the current price levels.

Also, if this situation remains a cause of fall for the stock prices then dip in price levels will continue in future as well. Despite this pressure on price levels of stocks, it is important to note that price trend can never be a straight line. It keeps on having short corrective actions in between the trend pattern. This acts as a short-term relief to traders, who are in a difficult position due to losses.
In this situation, the potential rally occurring before the announcement of the budget could possibly give opportunity to retail traders to gain profits. This type of market situation indicates that traders are more possibly going to sell their stocks when an increase in price level is observed. They are not going to hold the stocks for long-term gains. The reason for this is because retail traders anticipate that price levels of stocks will fall again.

Technical Analysis
The daily chart of the Nifty 50 represents a head and shoulder pattern. It is a bearish head and shoulder pattern. The price movement is also below the 20-day moving average. The 20-day moving average (MA) represents the average price movement over the period of the last 20 trading days. Overall, the technical analysis indicates the recent trend as downtrend. Also, the recent buy orders of traders are facing losses due to the current price being lower than the purchase price. Further, the traders are facing the burden of mark-to-market margin calls.

The head and shoulder is a popular pattern and also considered as the most reliable reversal patterns. The pattern is identified by a head, two shoulders peaks (left and right shoulders) and also a neckline (acting as a trendline). It helps to project price targets and it has a success rate of 65 percent. In the daily chart of Nifty 50, the trendline is acting as a strong resistance level. The projected price target for Nifty is around 21,657 for the upcoming few weeks. This projection remains the same unless any trigger occurs in the price movement leading to affecting price levels.

Effects on individual stocks under Nifty 50
Though the decline in Nifty may not be large enough, it is important to note that the indices represents an average price of its constituent stocks. The headline index Nifty 50 consists of 50 stocks. Due to this, decline in the Nifty 50 index trend will be moderate. However, the individual stocks will be inclined to drop adversely. No moderation effect will be observed in these stocks which would fail to mitigate the pressure shareholders will face in times of falling prices.

Intra-day ranges
The intra-day ranges for headline indices such as Nifty and Bank Nifty is between 1.25 to 1.75 percent daily. On the other hand, intra-day ranges for individual stocks is between 2.50 to 2.25 percent daily. These ranges indicate that the impact of decline in individual stocks is more than decline in indices.

While concluding, the baseline is that the investors should prioritise capital preservation than running towards capital appreciation.

The image added is for representation purposes only