Avoid Aggressive Leveraging

Any bounce from support, Nifty must sustain and cross the 24,105 with a strong bull candle and high volume. Focus on Pharma and IT stocks which may outperform. All other sector indices may underperform the broader markets relatively

The equities traded in a narrow range last week as NSE Nifty moved in just 292 points range during the week and ended with a 0.96 per cent gain. BSE Sensex was advanced by 0.84 per cent. The Midcap-100 and Small-cap -100 indices were up by 0.13 per cent and 0.22 per cent, respectively. The Nifty Auto and Pharma indices are up by 2.30 per cent and 2.25 per cent. On the flipside, the Nifty Media and Metal indices are down by 1.81 per cent and 1.05 per cent. The market during the week is neutral. The India VIX is down by 11.85 per cent to 13.24. The FIIs sold Rs10,444.10 crore, and the DIIs bought Rs27,474.14 crore worth of equities. The FIIs sold Rs2,95,896.53 worth of equities in this year, the highest ever.

After the 1,244 points range last week, the Nifty traded in a very tight range of 292 points last week. The volumes were very thin this week, less than half of the previous week. The index struck between 200EMA and 200DMA, all four days. In a truncated week, participation was very low as the holiday mood gripped. A series of indecisive, long-legged, small-body candles shows the market moods. Traders are not interested in taking positions as the new regime of F&O rules begins. Even the monthly volumes declined significantly. The low volume scenario may also continue next month.

The Nifty has formed a Shooting Star candle on a monthly chart. After last month’s flat close after a smart recovery, it formed a hammer candle and created hopes. But the current month’s Shooting Star candle erased all hopes. It also closed below the 10-month average. In another two trading sessions, it must close above 23,962 to avoid the breakdown. The monthly MACD is about to give a bearish signal.

For next week, the 10-week average of 24,105 and the 50-week average of 23,569 will act as resistance and support. In any case, if the index closes below the critical support 23,569 points, expect more pain in the market. As long as it sustains below the 200DMA, expect more distribution to happen in the market. As the holiday season for institutions, expect no major participation. The broader market indices also underperformed last week.

As we expected last, the Dollar Index (DXY) crossed $108, and the US 10-year treasury yields reached 4.63. These two major negatives for equities may harm in the short term. The BSE Dollex-30, which calculates the Indian market returns in Dollar terms, also declined. At the same time, due to this, FII outflows are the biggest negative for the market.

Relative Rotation Graphs (RRG) shows that the Nifty IT, Bank Nifty, Services Sector and Financial Services indices are inside the leading quadrant, but they losing the momentum. The Nifty Pharma, showing signs of improving momentum and relative strength, may begin outperformance compared to the Nifty-500 index. All other sector indices may underperform the broader markets relatively.

In a nutshell, the market is subdued and directionless. Keep a close watch on the 23,569 and 24,105 for a directional bias. Any bounce from support, must sustain and cross the 24,105 with a strong bull candle and high volume. Focus on Pharma and IT stocks which may outperform. It is not the time to take aggressive leveraged positions.

(The author is partner, Wealocity Analytics, Sebi-registered research analyst, chief mentor, Indus School of Technical Analysis, financial journalist, technical analyst and trainer)