Charts signal undercurrent bearish tone
Theequity indices nosedived last week and closed below the key supports. The Nifty declined by 443.25 points or 1.78 per cent. The BSE Sensex is down by 1.84 per cent. The Midcap-100 and Smallcap-100 indices are down by 3.30 per cent and 3.86 per cent, respectively. The FMCG index is the only gainer with 0.73 per cent. All other sector indices closed in the red. The Nifty Realty index slipped by 4.28 per cent. The FinNifty and Banknifty are down by 2.85 per cent and 2.71 per cent, respectively. The Energy and Pharma indices declined by 2.52 per cent and 2.07 per cent. The market breadth is negative. India VIX is flat at 11.75. The FIIs sold Rs.46,902.92 crore and the DIIs bought Rs. 94,828.55 crore worth of equities in August.
The Nifty registered the sharpest decline in the current downtrend. It filled the previous week’s gap and closed near the recent low. The nosedive-like decline with higher volume indicates a strong distribution. The index fell decisively below the 20-week average. The suspicious Head and Shoulders pattern indicates the downside risks. On a monthly chart, the index broke below the June low, which is an inside bar (July) breakdown, opening the doors to a more bearish bias. Importantly, last week’s shooting star got the confirmation of its bearish implications by closing below it.
The Nifty closed below the previous support zone of 24494-462 decisively. Only on the 8th August, it was below this zone, which was a whipsaw. Now, it is below all key averages except the 200 DMA. The latest downswing is five days old and retraced over 90 per cent of the prior upswing. It took 60 per cent of the time. For now, all practical purposes, the 25153.65 is the intermediate top and second lower high on the long-term trend.
Expect a technical bounce next week, towards 24691, which is 38.2 per cent retracement of the current downswing. Only above the positive bias will arrive. In any case, the index declining below 24337, which is a recent low, will trigger fresh selling pressure. The immediate support is at the 50-week average and the 38.2 per cent retracement level of the prior uptrend (7 April -30 June), which is at 24172-169.
As mentioned above, the breakdown of the Head and Shoulders pattern will have serious bearish implications. The pattern target is at 23260, which is also a 61.8 per cent retracement level of the prior uptrend. We cannot forecast more than this at the current juncture. On the upside, the index must close above the previous day’s high, first, which is at 24572 and the 38.2 per cent retracement level of 24690. The 20 DMA is also at a similar level of 24701. And 24779-868 will be a herculean task to breach. Only above this strong resistance, the index will be able to make a new higher high. If it fails to make a higher high, the trend will resume on the downside. There are several resistances before 25153.
The daily RSI entered the bearish zone, and the weekly RSI is below 50. The daily MACD has given a fresh bearish signal. The -DMI is dominating and the +DMI and ADX. The rising ADX line indicates a strengthening bearish grip. The index currently has three distribution days. In this scenario, avoid fresh buying and try to take out the profits on the table. The Nifty may find support at 24170. The 200 DMA of 24071 is strong and long-term support. A close below this is negative. In such a scenario, reduce the portfolio size and stay on the sidelines.
(The author is partner, Wealocity Analytics, Sebi-registered research analyst, chief mentor, Indus School of Technical Analysis, financial journalist, technical analyst and trainer)