Declining ADX indicates weakening trend

The domestic equity market recouped from the last week's losses and settled at a new lifetime close. With the positive global cues and the leadership from IT and metal sectors, the market was buoyant. During the last week, the NSE Nifty advanced by 177 points or 1.13 per cent.

The BSE Sensex up by 1.1 per cent and the broader markets moved in line with the benchmarks. The Nifty Midcap-100 and Smallcap-100 up by 1.5 per cent and 1.2 per cent respectively. The Nifty Metal and IT indices up by 3.47 per cent and 2.7 per cent. Auto and Bank Nifty also higher by over two per cent.

On the flip side, the FMCG down by 0.77 per cent. Overall, the market breadth is positive, but it managed to be positive. Both the FII and DIIs buying turned positive as they bought Rs3,162.86 crores and Rs2,436.20 crores respectively.

The market is mostly traded in the zone of key support and resistance. For the past four weeks, the Nifty struggling to move above 15,900 level. The buying demand is emerging from the support every time and helping the index recover. The weekly price movement engulfed the last week's bear candle is a bullish pattern.

Still, the NSE Nifty is confined to the 15,896-15,673 zone, mostly during the week. This tight little over 200-point range is critical for the very short-term direction. Barring three or four days, the Nifty traded in this zone for the whole month.

This sideways price action, indicating never-ending confused, and warning signs. Several bearish and incisive candles failed to get the confirmations. It has become extremely difficult to trade intraday or positional, as the Nifty moves in unexpected ways. A price spends more time sideways with one day up and another day down; the breakout of either side will give the sharpest possible move on the breakout side.

There is no point in discussing the averages, as the index is at a high. The Nifty has not closed below the previous week's low, which is another bullish sign. For the past 17 days it rose only by 280 points. This shows range-bound price action. These divergent moves are just stronger strength. As the market is gaining support from fresh buying support, it shows no intent to decline at the lower levels.

The index is moving higher in a slow pace. The RSI (68.31) on the weekly chart is at the near overbought zone and shows negative divergence. The daily RSI is at 65.14, also showing the divergence. At the same time, the price and the indicator formed a cup and handle pattern, is a bullish sign.

The histogram shows the flattish momentum. The negative directional indicator -DMI is above the +DMI on a daily chart, when the price closed at a new high, it is also a surprise negative bias. The ADX (15.62) is declining as the market is moving in sideways, indicating weaker strength of a trend. Volatility index Nifty VIX declined by 9.66 per cent to 13.37, which is a new low.

This low volatility is a big concern. Low volatility is not good for any trend, and it is the lowest level since February 2020. As we know, the result of low volatility is not a time to be complacent on the portfolio. As we met our earlier targets on Nifty, we suggest booking some profits at the current level, stay in the sidelines.

There are many divergent hints that shows that the market may top out very soon. It is difficult to catch the exact top too. Be in sidle lines and wait for a close below 15,670 points for very short-term short positions. In any case, the Nifty closes below 15,431 points on a weekly basis, and we can build aggressive shorts.

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