Tread cautiously as markets in bear grip

Indian stock market ended on the negative note in a holiday truncated week. In a three-day short trading week, Nifty lost 61.85 points or 0.55 per cent. Majority of indices including Sensex fell more than half a per cent.

Nifty IT is the worst performer with a 2.9 per cent loss. Nifty closed in positive territory, but the market breadth is negative as more number of shares closed in a negative zone.

And the FIIs sold Rs 9,049.51 crore worth of shares in last ten trading sessions. However, markets performed well on Friday as the Prime Minister's Independence Day speech generate some optimism about a stimulus package.

But, later, the Finance Minister clarified that the package would be at an appropriate time. The effects of these contradictory statements will be visible next week.

Technically, Nifty formed an inside bar on a weekly chart and traded within the Tuesday's range on Wednesday and Friday. This co-incidence of back to back inside bars on a weekly and a daily chart is a rare phenomenon.

On Friday Nifty formed a dragonfly doji with a long bottom wick. Nifty needs to open above Friday's close and must close above Wednesday's high of 11078 to reach the earlier mentioned target of 11244.

As we discussed last time, Nifty is moving in counter-trend consolidation pattern or a Flag. A bottom Dragon Fly Doji indicated bullish reversal if the price closes above Doji high on the following day.

As Nifty is moving in a corrective consolidation zone, this pattern is important for traders to know the future action. The flag resistance line is placed at 11,244 and the same also a 50 per cent retracement of July 17 to August 5 fall.

In any case, the upmove continues for the next few days and Nifty may reach to 11,354 levels. Beyond this, we can't project further target in the short term. But investors need to be cautious as we are moving in a bear Flag. Any downside breakout will lead to another leg of a massive correction.

In another way, for a shorter period, Nifty must take out Tuesday or Friday's high 11181-11145 zone to gain bullish strength. At the same time if it slips below the 10924- 10900 level, then the market will get a confirmation for the bearish flag breakdown.

As rule, Flag will form in less than three weeks of time with receding volumes. As of now, Flag is seven trading sessions old and volumes are receding. As long as these levels protected, traders may feel stuck in the positions either side. The volatility increases with big down bars and smaller up bars.

On the weekly chart, Nifty is making lower highs for the last seven weeks. But last week, it made a higher low but with an inside bar. In this case too, last week's high and low will critical for future moves.

The 11,181 level works as resistance and 10,900 acts a support for the next week. On the weekly and daily charts, these levels are similar. Remember this 280 point range for trading ideas.

The leading indicator, RSI moved above the 40 zones and needs to close above the 17th July level of 48.5 to give bullish breakout. There are not positive divergences at current juncture in any indicator.

A cyclical indicator stochastic is already given probable downside move next week. The Directional indicator, ADX, is showing that the bears are still with the strength and waiting for a next move.

The bears still have a tight grip on markets and the bulls are not in positions to retrace faster manner. It is better to wait for clear move on either side.

Certainly, it is not a time to build a portfolio with an aggressive manner. Be defensive and be in control of your positions with strict money management principals.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)