Stay cautious till decisive trend emerges

The domestic market closed positively for the second consecutive week. A sharp bounce helped the key indices close above the prior week high. The NSE Nifty gained by 202.15 points or 1.13 per cent. The BSE Sensex is up by a per cent. The broader indices Nifty Midcap100 is up by 1.5 per cent, and Smallcap-100 advanced by 1.3 per cent. On the sectoral front, the Nifty IT index is the top gainer with 2.8 per cent and the Energy index up by 2.7 per cent. The market breadth is not negative as the declines are outnumbered. FII sold Rs4004.01 crore, and the DIIs bought Rs 62.31.48 crore worth of equities.

Equity benchmark indices extended the pullback for the second consecutive week with high volatility. It gained 431 points in the last nine trading sessions during this month. However, it ended with a significant negative bar by closing below the prior week's low during the last week of October. The last two weeks of price action are limited to the previous week's range and forming an inside bars. With this sideways action for the last two weeks, the 17613 - 18342 levels have become the near-term import levels. Unless these levels break on either side, the consolidation may continue for some more time.

A strong bounce-back from the near 50DMA support at the weekend has eased the downside pressure on the index. Now, we need to look for its behaviour at the resistance of 18342 next week. The breakout with an above-average will be an important event for the market direction. One interesting point is that the Nifty has not made a major lower as of now. The previous swing lows are at 17452 and 17613. These levels will act as very critical supports for the market. Friday's over one per cent move has erased the bearish flag pattern breakdown.

Interestingly, this flag's upper trend line resistance is also placed at 18342. In any case, it fails to surpass this critical resistance and closes below the prior day, and it will have serious implications of retesting the supports at 17613 and 17452. A break of these clusters of supports and a resistance will give us clarity on the future trend.

On a weekly chart, the Nifty formed a bull candle with a higher low and higher than the prior week, gives a positive bias on the direction. But, we need to form an outside bar. The current counter-trend consolidation is already 17 days old. Expect this may end in the next two weeks of time. A failure form a new high above 18605 and a decline towards 17452 will indicate a beginning of a downtrend.

On the front of the indicator, the RSI has taken historical support at near 40 zone and bounced back to above 55. It needs to move above 70 zone to negate the bearish implications of current consolidation and to form a new high. There is no fresh negative divergence is visible in the indicator. As the Nifty escaped from the danger of forming a negative bar on a weekly chart, the MACD histogram returned to the above zero line, after a brief period of spending below the zero line. The daily histogram is still in the below zero zone. The directional movement indicators are at a confluence point and expect an impulsive move on either side.

As daily -DMI is still above the +DMI and ADX, it is better to wait for a bullish confirmation to take a long position. The Mansfield Relative Strength Indicator is sustained below the zero line, and shows an underperformance compared to the Nifty-500 on a weekly basis. The benchmark index is moving higher but, the relative strength has been weakening since November 2020. The indicator tested the zero line twice during the last one year. Unless the large-cap stocks out-performs the broader market, we may not see a stronger bull market in the near future. The Nifty is above the 20DMA, but it needs to turn up again.

In a nutshell, the market is in a consolidation, and it needs to move out of this zone. As long as supports are protected, be with a positive bias. At the same time, we cannot assume that the uptrend has resumed. We need to be with a cautiously optimistic approach towards the market. Unless a clear, decisive trend has emerged on either side, it will be challenging to manage the trades. The earnings season is ending, and we may see a sector-specific activity with leadership from the stronger stocks.

(The author is a financial journalist and technical analyst)