Avoid aggressive exposure this week

The domestic and global equity markets have shown strong weakness last week. The Indian benchmark indices ended on a winning streak in the last two weeks. Nifty declined by 526 points or three per cent. The BSE Sensex also declined by 3 per cent. The broader market indices Nifty Midcap-100 and Smallcap-100 indices are down by 4.05 per cent and 3.57 per cent respectively. Nifty IT gained by 1.97 per cent. FMCG index declined by 4.58 per cent. Overall, the market breadth is negative for a whole week. The benchmark index registered three distribution days.

As we suspected, the market collapsed in the last week. Nifty registered the lowest weekly close after August. It formed another bearish engulfing candle. It oscillated in the 673 point range and finally settled lower by 526 points. The weekly down bars are larger than the up bars. During the last week, it formed the third lower top, and on the way to form the third bottom. The index closed below the 50 retracement level of the rally from July 28. As stated earlier, the 18604 is an intermediate top for now, and we may see this level again in this financial year.

Nifty began the week with a positive note just above the 50 EMA, but a serious profit booking dragged the index and formed a bearish engulfing bar. Friday's decline of 1.53 per cent resulted in a breakdown of a counter-trend consolidation. With the 13-day bearish flag breakdown, Nifty has resumed its downtrend. The immediate supports are 16891 and 19782, which are previous lows. The bear flag pattern target is placed at 16211. It may take a rest at 16757 for a day or two before meeting the target. As per the time cycle, the target of 16211 may be achieved in 8 to 13 days. During the Flag formation, Nifty retraced exactly 61.8 per cent from 16782 to 17639. With the breakdown, the index retraced 78.2 per cent from 17639. Looking at the current price action, if the Nifty fails to protect the prior low of 16782, an impulsive downward move is possible. The index declined below the 20-week average, and the lower band is at 16245, which is also near the pattern target. Any pullback efforts must cross at least 20DMA of 17271. Otherwise, bears will dominate the market.

The weekly 14 period RSI is at 50, which indicates that it came out of the strong bullish zone. MACD histogram shows an increased bearish momentum. There is no divergence visible at this point. The stochastic oscillator is at an extreme overbought condition. This may lead to a small pullback. If the pullback happens next week, we can expect an inside bar at maximum. The broader resistance zone for next week will be around 17134-271. After only a decisive close above the 17271, bulls will get the energy to move higher towards the 17400-540.

As there is no sector to lead the market, it is important to watch selective stocks. The IT, Pharma and Auto sector stocks may outperform the broader market. Avoiding aggressive exposure and a highly cautious and selective approach for this week is recommended.

(The author is financial journalist, technical analyst, family fund manager)