Markets in bear grip, likely to be volatile

The Indian stock markets are in complete bear grip for the last five weeks. The benchmark index Nifty lost 302.95 points or 2.68 per cent last week. The BSE Sensex closed with a 2 per cent loss and small-cap-100 was the worst performer with a 4.7 per cent loss.

Midcap-100 index also lost 2.8 per cent. The lone survivor in the market is IT index with a 0.5 per cent gain. The Nifty Media index lost 12.3 per cent and the Metal index lost 8.7 per cent. All the sectoral indices are trading below their 50 DMA.

All the sectoral indices are trading below their May low and the broader market indices are near to the two-year lows. The FIIs has withdrawn Rs 16,870 crore investments in July. Even in two days of trading in August, they pulled out Rs 3,945 crore.

Nifty is apparently entered into a downtrend. Despite decisively closing below the long-term trend indicator 200DMA and a very long upward channel support on the intraday basis, it closed inside the channel.

After filling the May 20th gap area, it also closed below the May lows. This price action confirms the bearish trend. As we pointed out in earlier columns, the near-term and psychological support 11,000 breached on a weekly closing basis. By breaching the May low, the Nifty formed a lower low on a weekly basis, which is a trend reversal sign.

If the last week's low 10848 holds for next, the Nifty may recover to form another lower high. If everything is on expected lines and no further negative news flows, Nifty can move upwards up to the level of 11330 to 11600.

This 500-600 point bounce is normal after a 10 per cent correction from the top. Earlier, in January-March 2018, the Nifty corrected about 10.9 per cent and September-October 2018 it corrected 14.9 per cent from their respective tops.

Incidentally, these corrections took seven and eight weeks, respectively. This time, the correction is already eight weeks old and corrected 10.36 from the top.

Historically, there are very few instances, where Nifty corrected over eight weeks at a stretch.

The Nifty also took support at 60 per cent retracement level and 100WMA. As these are the historical support areas, the Nifty respected them for now.

Remember that the expected retracement is only an ongoing corrective consolidation pattern. In this phase, the market will give an opportunity to rejig the portfolios for the near future.

In any case, the retracement is limited to only to 11,145 to 11,330 range, then the next leg of fall could be another falling knife. In this case, the medium-term targets for the Nifty are placed at 11,400- 11,470 levels. This could be an intermediate bottom.

With the five weeks of fall, the indicators are completely under bearish mode. The RSI is clearly moving in the downward channel against the price trend. This negative divergence is for the ongoing correction in the market.

For the first time after October 2018, RSI slipped below the 30 level. However, there is some positive divergence signal in an hourly chart. This divergence could reflect in higher time frame charts if the market moves up next week.

The sharp recovery in view of Government's rethink on recent policy initiatives, could not form higher highs even on the hourly chart. Once Nifty inches up beyond Friday's close, it can move up to 11330 initially as mentioned above.

Wait for a close above Friday's high of 11080. Buying interest will generate after this move. As long as the Nifty trades above 11000 level on a closing basis, it will be with a positive bias.

Traders need to avoid short positions and a wait for a close above 11080 to take fresh longs with strict stop losses. The volatility will increase as emotions are at a peak.

The Government's initiatives or actions are important at this juncture to protect the market fall.

The FPI surcharge, the minimum public holding clause for listing companies and the CSR spending rules are dampening the corporate morale and market sentiment.

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