Low VIX indicates red flag on bullish bias

For the fourth consecutive week, the domestic market was buoyant and continued its upward journey. This is the first time in this calendar that the indices up for four weeks in a row. The benchmark index scaled a new high and also registered a new high close during the last week.

The NSE Nifty traded in 268.65 points range and finally settled at 15,799.35 with 129.1 points or a 0.8 per cent gain. The BSE Sensex up by 0.7 per cent. The out-performance of the broader market continuing. The Nifty midcap-100 and smallcap-100 indices up by 2.9 per cent each.

As we expected, last week, the Nifty IT and pharma hit the new lifetime high with 4.5 per cent and 2.6 per cent gains. The media index also advanced by 3.5 per cent. On the other hand, the Bank Nifty declined by 0.69 per cent, and the FinNifty down by 0.5 per cent.

During the last nine trading sessions, the FIIs bought Rs47,88.03 crores, and the DIIs sold Rs1,805.27 crores worth of shares. Overall, market breadth is positive during the week.

Technically speaking, the Nifty formed a perfect Doji candle on Friday. Several such bearish failed to get the confirmation in recent history. This time better not to predict the direction, but cautiously follow the trend. An indecisive candle with a declining momentum at the new lifetime high is not a strongly bullish sign. The volume trend also decelerated for the past four weeks.

In fact, the volumes are declining since the beginning of this year. But the Nifty gained 11.45 per cent since the April 22 low.

It looks like the market overstretched a bit technically. It also retraced exactly 127.6 per cent of the previous fall. It has also met the 50 per cent of the cup pattern breakout target. Currently, the Nifty is trading 2.47 per cent above the 20DMA and 15.76 per cent above the 50DMA.

The distance from these short-term averages is are also important to gauge the market stretch. Earlier, when the index moved over 20 per cent to the 50DMA, it pulled down near the moving average. The current bar structure on daily and weekly time frames shows the overstretched condition and exhaustion.

However, there is no significant bearish signal, except overbought condition, there are several concerns on the market direction. The VIX lowest level is the first concern on the market direction. As mentioned earlier, the index and VIX has an inverse relationship. The Low VIX levels indicates a red flag on the bullish bias.

During the last week, the Nifty witnessed some sharp declines of over 100 to 200 points in just 10 to 15 minutes, indicating low VIX. Last week, the VIX declined by 11.53 per cent and below 15. The low VIX will lead to a sharp decline. At the same time, the momentum is clearly decelerating.

The histogram is declining for the last nine trading sessions when the Nifty is moving higher. There is a negative divergence visible on RSI on a weekly chart. There is a divergence with Bank Nifty too. The Nifty closed at a new lifetime high, but the Bank Nifty still seven per cent below its lifetime high.

Technically, the Nifty needs to close below 15,660 points to get a bearish confirmation. Even it closes below 15,750 also give an early signal of a reversal.

Keep a cautiously optimistic approach to the market, as long as these levels are not broken. Maintaining a trailing stop loss and be vigilant on the sharp moves. It is better to reduce the position size as a risk management practice.

(The author is a financial journalist and technical analyst. He can be reached at [email protected])