Short covering bounce possible toward 18440 zone

The equity benchmark and sectoral indices continued to fall for the second on the weaker market breadth and intensified selling pressure. NSE Nifty declined by 71.75 points or 0.39 per cent and closed at 18127.35. All sectoral indices were closed negatively. The Realty, Metal, Auto, and the PSU Bank indices were down by 1.1 per cent to 1.42 per cent. Only the Nifty IT index closed almost at the previous level. All other sectoral indices were down by 0.1 - 1.0 per cent. The market breadth is extremely negative as 1680 declines and 267 advances. About 109 stocks hit a new 52-week low, and 191 stocks traded in the lower circuit. Adani Enterprises, PNB, and Infosys were the top trading counters today in terms of value.

The equity benchmark index witnessed multiple breakdowns today. It has formed a first major lower low by declining below 18137. It also declined below the rising trendline support drawn from the September low and broke the 50DMA support too. The index declined below the recent swing high, 18096. This means, It broke the prior support and resistance, which is negative. Importantly, the 20DMA entered into a downtrend. During the day, the RSI declined below 40, indicating strong bearishness in the market. The weekly RSI is also now below 60. The index added another distribution day, and the total distribution days currently Nifty holding is 5. These are all pointing towards the market topping.

A short covering bounce is possible toward the 18440 zone. The last two days of decline are very sharp. As I stated earlier, the historically near lowest VIX is an inverse relationship with the index and forms a top. This is exactly what is happening now.

Several leading stocks broke the supports and registered bearish pattern breakdowns. The outperforming Bank Nifty also ended, as it closed sharply below the 23.6 per cent retracement level of the prior uptrend. PSU Bank index, which led the sector, is now in a weakening quadrant in RRG charts on a daily time frame of the last ten days' history. Almost all the sectors are losing momentum and relative strength compared to the broader market. For the last two days, the advance-decline ratio has been extremely negative. The MACD line is near the zero line, and the histogram shows a sharp increase in the downside momentum. For now, As long as, Nifty trades below 18442, we will get opportunities to sell on a bounce. Only above 18442-526, we may see the bulls back into action. On the downside, 18070, which is a 38.2 per cent retracement level, will be the immediate strong support. Today it precisely tested 18068.60 and holding for now. With a decisive close below this, the index will test 17565, with a high probability in the near term.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)