Nifty to correct, at least 20% from lifetime high

On the volatile week, the Indian stock market ended with a negative for the third consecutive week. The rise in Covid cases, local level lockdowns and increasing restrictions in major metro cities spoiled the investor sentiment. The benchmark index, the Nifty, lost 276.5 per cent or 1.89 per cent during the last week. The BSE Sensex declined by 2 per cent. During April, the FIIs sold Rs 7,583.11 crore, and DII bought Rs 7,960.71 crore. The market breadth is mostly negative during the week.

On the weekly chart, Nifty formed another indecisive, long-legged Doji. Three consecutive Doji candles on a weekly chart mean a definitive weaker market. As Nifty forming lower highs and decisively below the channel support line and 20 weekly moving averages is not a good sign. At the same, momentum on the downside is increasing. As I mentioned last week, the market is in a confirmed downtrend. The weekly range was lower than the previous two weeks. But, the Nifty price structure is damaged as it has broken down the key levels. Since March 2020, the current consolidation is the longest one and breached several supports for the first time.

On a daily chart, Nifty formed a shooting star-like candlestick pattern. Even on Friday last, it formed a similar candle. Nifty opened with a huge gap down on last two Mondays. In this scenario, Nifty must close above 14468 to get positive strength, and closing above 14700 is a short-term reversal. If Nifty opens at least one per cent above, and closes above 14400, it will be a positive sign. If it falls below 14265 support, there will be severe bearish implications. However, it is time to be bullish, definitely. Nifty once again closed below the 100DMA. During last four trading sessions, it closed below the 100DMA on alternate days. Earlier, this kind of oscillation was seen at 50DMA. Before a decisive close below the 50DMA, it oscillated for two weeks. For the last four days, the 50DMA is trending down, indicating weakness. Once the 100DMA also trends down, then the market will decline further.

Currently, the consolidation range is limited to 14880-14265. Within this range, Nifty further consolidating between 14700-14191 for the last eight trading sessions. Unless Nifty moves above 14700 in the short term, the short-term trend will be negative. On the indicators front, the weekly 14 periods RSI has made a fresh low at 55.68, and almost near to the 20th September low. It is not showing any divergences. It is below the historical support of 45 and staring at the bearish zone on a daily chart. If the RSI fall below 40 on a daily closing basis, the market will decline further. Nifty may underperform the broader market in the near term.

The earnings report is failing to cool down the Price-Earning ratio. Nifty PE ratio is still much above 32.07. The lack of pleasant surprises in the earnings is one of the reasons for the sluggish market. Covid surge and the lockdowns are becoming real concerns for the economy now. Suddenly, situation across the nation has become grim. Let watch for demand growth in the near future. Unless a smart and early recovery, we can't be bullish for at least the next two quarters. It is difficult for Nifty to cross recent top of 15431. I still believe that the market will correct at least 20 per cent from the lifetime high. Or at least it will test the 2020 high of 12430.

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