Approach markets in a high stock-specific way

Domestic equity market benchmark indices snapped two-week winning spree and ended on a negative note. The NSE Nifty went down by 223.60 points or 1.22 percent during the last week and settled at 18,114.90 points. The NSE Nifty started the week on a positive note as it gapped higher on Monday. It made a new lifetime high on Tuesday at 18604. The Nifty Midcap-100 and Smallcap-100 indices were down by 4.4 percent and 5.4 percent. They declined seven percent and eight percent respectively from the high. The Bank Nifty gained by 2.5 percent and Fin nifty up by 1.9 percent. The Nifty FMCG index is the top loser with 6.1 percent. The remaining sector indices fell by 5.2 percent to 5.5 percent. The broader market breadth is extremely negative. Both the foreign and domestic institutions have become net sellers during the current month till now. The FIIs sold Rs9,869.93 crores and DIIs also sold Rs4,956.24 crores in the current month.

The Nifty has met our target of 18600-650 on Tuesday. Bang on!!!. After meeting pattern target and Fibonacci extension levels, the benchmark index has reacted to the downside. It registered four consecutive negative sessions last week. The weekly chart has formed a dark cloud cover candle, which is bearish in nature. In any case, the Nifty closes below the 18,034 level, the bearish implication of dark cloud cover will get confirmation. In recent history, we have experienced that many of the bearish patterns failed to get the confirmations. We need to wait for confirmation to exit the market and change the stance to the downside.

The market, as we are reiterating for the past few, is overbought and overextended. To come out of this condition, the profit booking is inevitable. Some of the indicators are already coming out of the overbought condition as the indices corrected in the last week. On a weekly chart, still, some indicators are in an overbought condition. The RSI has formed a double top and negative divergence on the weekly chart. In any case, the RSI closes below 73, the bearish implications of the negative divergence will get confirmation. The Stochastic oscillator is in the extreme overbought condition and forms a negative divergence. The ADX shows that the trend strength is deteriorating in the daily time frame. During the last week, the Nifty took the support at near 50 percent retracement level (18028). The 20 DMA support is at 17,952. This 17952-18028 zone of support is very critical for now. The VWAP Anchored at 1st October low is at 18041. And the 20 EMA is at 17957. So there are multiple supports around the 18000 zone. Unless the support is broken decisively, otherwise will not disrupt the ongoing trend. As the index is at multiple crucial support levels, we need to be cautious. In any case, the Nifty comes under further selling pressure and breaks the support levels, the market will witness a steeper correction. As stated above, a move above 18320 will bring some positive sentiment into the market. There is the probability that the Nifty may undergo the consolidation between 18000-18600 for some period before taking a decisive direction.

The India VIX surged above 18 level during the week and settled at 17.55, up by 11.27 per cent. In the Options market, the Implied Volatility (IV) also advanced to near 15 levels. Sustaining above 18 levels will increase the swing lengths and it will become an extreme difficulty in shorter period trades. Even within 17940-18600 zone consolidation also experience volatility.

Currently, the Nifty holds four distribution days in the last 45 days. Any addition of another three distribution days next week will change the market direction. One distribution day is expiring next week. The previous week's over two percent decline has resulted in momentum loss. Given the current technical setup, we can expect the pockets like PSE, Banks, PSU Banks, Auto, and select Financial Services stocks to put up a resilient show. We recommend avoiding excessive leveraged exposures and continue approaching the markets in a high stock-specific way while vigilantly protecting profits at higher levels.

(The author is a financial journalist and technical analyst)