Caution alert on leveraged positions

India VIX is back to 10.62 level. During the previous week, it showed volatility of 20%. It rose by 3.08% last week, but it is very near to the historical low of 10.14

The equities registered another positive week amid increased volatility. NSE Nifty traded in the 362 points range and closed with 97.55 points or 0.50 per cent gain. BSE Sensex also gained by 0.40 per cent. The Mid-cap-100 and Small-cap-100 indices advanced by 0.6 per cent and 0.4 per cent, respectively. On the sectoral front, the Realty gained by 4.3 per cent, and the Auto index up by 2.9 per cent. On the flipside, the PSU Bank index is down by 3.2 per cent, and the IT index has declined by 1.7 per cent. The FIIs sold Rs10,612.63 crore and the DIIs bought Rs8,372.83 crore worth of equities. The market breadth is primarily positive.

As we made a forecast in last week’s column, the market has been largely consolidated in the zone. The consolidation above the 19,500 support zone is expected, as it tested four times in the last two weeks. The pullback is ended at a 50 per cent retracement level of the prior downswing. The Nifty has formed an engulfing candle on a weekly chart by closing above the previous week’s high. For the last three weeks, it mostly moved in the 19,480-766 zone. Either side of this zone will give directional clues.

Even though the Nifty recovered smartly from the lows on Friday, the price structures show exhaustion. Considering the Wednesday and Thursday move as an evening star, the gap down open and closed below Thursday’s low confirms the pattern’s bearish implications. A 0.22 per cent decline with higher volume in the last seven days meets the distribution day criteria. Currently, the Nifty holds five distribution days in the last 25 trading sessions. In any case, increasing distribution days and closing below the 50DMA (19607) will change the market structure into a trend under pressure. For a confirmed downtrend, the bears need to drag the Nifty below 19333 decisively. In such a case, the index will form a swing low. Thursday’s high of 19843 can be considered a lower high, as we believe the pullback is done.

The Nifty took support at a 20-week average in the previous week and bounced. Currently, it is placed at 19,387 points, which will act as a crucial support. Interestingly, the 20DMA entered into a downtrend, which is a short-term negative. The Upper Bollinger band is also falling, and the lower band is flattened. This indicates that the upside potential has very low chances. The equity market will consolidate as long as the 19,333-387 zone of solid support is protected.

The India VIX is back to 10.62 levels. During the previous week, it showed volatility of 20 per cent. It rose by 3.08 per cent last week, but it is very near to the historical low of 10.14. On Friday, the CBOE VIX sharply up by over 20 per cent, signalling a serious caution for the global markets. The fear factor in the global markets is at its peak. The reason is that the Israel-Gaza war can be escalating to many more countries, which can influence the economies. A heavy volume volatile move on Friday hinted at more volatile days. The low VIX regime remains a concern for a trending market. Expect more intense profit booking bouts frequently.

On the indicators front, the daily RSI is still in the neutral zone and failed to move above 60 during the pullback. The MACD on the zero line does not show any strong momentum on either side. Any further upside above 19,843 will face strong resistance at the gap area of 19,880 points. Expect more consolidation in the 19,333-19,883 zone. Be with neutral to bearish bias as long as it trades below 19,883 points. Stay cautious, and be vigilant on leveraged positions.

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