Volatility likely to haunt markets further

Markets surprised everyone with bigger gains at the end of the week. Trading in a narrow range for the three days, Sensex jumped over 3 per cent on Friday with RBI's liquidity measures and changes in NPA classification.

Nifty gained 154.85 points, or 1.7 per cent, during the last week. The BSE Sensex advanced by 1.4 per cent. The broader indices, Nifty Midcap-100 and Smallcap-100, outperformed the benchmarks with 4.1 per cent and 7.1 per cent respectively.

Barring Nifty IT index with 0.2 per cent negative close, all the other sectoral indices closed with decent gains. Nifty Metal gained by 6.6 per cent and Nifty Pvt Bank index rose by 5.4 per cent.

Technically, Nifty reached near to the 38.2 per cent retracement level and the rising wedge resistance level. As I mentioned earlier, most of the bear market rallied matured at 38.3 or 50 per cent retracement levels.

There are several scenarios are in store for the near term. Before discussing them, I would like to emphasis on the sectoral behaviour in the bear markets.

There are several similarities 2008 and 2020 bear markets. During 2008 subprime crisis, the financials, reality, infra sector were beaten down to the rock bottom.

The pharma, FMCG and consumption sectors were the outperformed during the 2008-09 bear market. Similarly, this time also the same sectors are outperforming the benchmark index.

The smart money is moving into these sectors. Now, let us compare with the much broader index with sectors, themes and stocks representation with Nifty.

The study includes 2000-01 and 2008-09 bear markets for a contextual understanding of 2020 bear market structure. I did not consider 2011 and 2015 bear market conditions as the rallies were limited to 15 per cent only.

In 2000-01, the bear market rallies were 33 per cent, 30 per cent and 27 per cent. In 2008-09, the rallies recorded were 20 per cent, 23 per cent and 38 per cent. 2001 bear market lasted for 21 months and 2008 bear market lingered for 13 months.

Both times, the market has three relief rallies. And both bear markets rallies confined to 23.6 per cent and 38.2 per cent retracements.

Of course, this does not mean that retracements in the current market cannot go beyond these levels, We should keep in mind that even a 62 per cent retracement can still keep the bear market intact.

For now, my take is that up to 50 per cent retracement we should not jump the gun and consider any bull market structure emerging.

The only thing we know for now is that the first-leg fall of 2020 and 2000 are similar and so, we have a basis for looking ahead with that probability.

The fundamental economic structure, not just in India but the world over, also does not look to offer much optimism–interest rates near the bottom, central banks' liquidity easing options minimal etc. to name a few.

Further, recovery from Covid-19 impact is mostly likely to be slow and prolonged.

Now, Nifty-500 retraced just like Nifty. It is near to the 38.2 per cent retracement. Most importantly, for the first time in its history, the Nifty 500 consolidated for a long period, for almost 25 months and fell sharply by 39.54 per cent from the top. This is a clear case of Stage-3 distribution.

It is once again proven that the bear market bottoms formed on negative fundamentals. When the lockdown began on March 24, Nifty formed a bottom.

Even when lockdown was extended, the index consolidation for three days and rallied further. Several patterns can be seen during the last 14 trading sessions - a rising wedge, an ascending triangle, a flag and finally head and shoulder.

Out of these patterns, half of them are bullish and the remaining half, bearish. Bullish signals indicate that retracement could go beyond 50 per cent if Nifty moves above 9,390 (38.2 per cent retracement). But, this upside will not happen so easily.

The Nifty can test 8,900 once again before going further upside. As I mentioned in earlier, the 9,390-8,904 zone is still valid. If Nifty fails to move beyond 9,390 and falls below 8,900, the bears will resume working to dominate the market.

Once above 9,390, Nifty can go up to 9,800-9,900 levels. If it slips below 8,900, it can test 8,417-8,203.

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