Avoid Fresh Buying As Long As Nifty Trades Below 50-Wk Avg

The current price structure is a perfect picture for the bear market. So, the recent swing high of 23,807 is the crucial resistance and only a close above this level will form a higher high, which is the first sign of reversal

The broader market came under the bear attack as the mid-cap, small-cap, and micro-cap stocks fell sharply lower. The benchmark index, Nifty, declined by 630.70 points or 2.68 per cent. The BSE Sensex is down by 2.47 per cent. The Midcap-100 and Smallcap-100 indices nosedived 7.38 per cent and 9.41 per cent, respectively. The Microcap-250 index is down by 9.64 per cent. All the sectoral indices closed with significant declines. The Nifty Realty is down by 9.4 per cent; Consumer Durable declined by 7.71 per cent. The Energy index is also down by 6.68 per cent. The market breadth is negative. The India VIX rose by 9,72 per cent to 15.02. The FIIs sold Rs29,183.43 crore, and the DIIs bought Rs26,019.07 crore worth of equities this month.

In recent history, the Nifty has registered one of the longest streaks of declines, eight days, It managed to hold the previous low on a closing basis, but recorded the lowest low. The 22,800 level has been holding for the last 16 trading sessions and is now a crucial support. As we discussed earlier, the Mid-cap, Small-cap, and Micro-cap indices entered decisively into the Stage-2 correction. As of date, the Nifty corrected 13.33 per cent. On the sectoral front, barring Bank Nifty and FinNifty, all the indices corrected 10-32 per cent. The breadth has been extremely negative last week. A majority of listed stocks have declined below 200DMA. This shows the bear’s grip on the market. Now, the question is, how long will the correction continue, and how much is the correction due?

The recent longest streak of swing is 12 and 14 days, from the 14th of August to the 26th of September. The reasonable trending swing life is normally 8-13 days on either side. In a bull market, the uptrends are longer and have a mix of small and big candles. In a bear market, the declines are sharper, and all pullbacks are traps as long as the price moves in lower highs and lower low manner. The current price structure is a perfect picture for the bear market. So, the recent swing high of 23,807 is the crucial resistance and only a close above this level will form a higher high, which is the first sign of reversal. At the same, the low of 22,774 must be protected. The current downswing may end anytime in the next five days. If the bounce begins from Monday, the Nifty faces resistance at the 23,169-255 zone.

Currently, the Nifty is 3.58 per cent below the 50-week average. The index deviated from this average to this extent earlier during the first major correction post-Covid, June-July. The Weekly RSI is on the support of 40 for the second time in three weeks. Earlier, it violated the 40 support during June-July 2022. So, if the weekly RSI declines below 40, expect the correction to continue. Earlier, the index declined 10.33 per cent below the 50-week average. In Category-2 corrections of 25 per cent from the top, the index can decline up to 15 per cent below the 50-week average. A majority of the Category-2 corrections ended in eight months, except the 2020 correction of 39.37 per cent. The 4th June low of 21,281 is 19.01 per cent from the all-time high. If the Nifty fails to close above the 50-week average of 23,779 and the previous week’s high of 23,807, expect the Nifty to test 22,281. The Category-2 correction (25%) target is almost at 20,000. And, if this correction ends in eight months, expect the Nifty to form the bottom during May. Interestingly, the rising trendline drawn from the March 2020 low acted as support last week for the fourth time. The prior swing high of 22,775 was also supported last week. In this scenario, the 22,775-800 zone is rock solid for the next 1-2 weeks. A pullback towards 23,169-255 is a possibility. Watch the price behaviour around this zone. Any decline from this level will breach the 22,775-800 support zone. Below this, the Nifty can test the 22,450-350 zone of support.

In this background, the traders must approach the market with a heightened alertness. The index behaviour in the 22,800-23,255 zone is key before the monthly expiry. Any bounce is an opportunity to take profits if any. Avoid fresh buying as long as Nifty trades below the 50-week average.

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