Charts Flag Caution Alert

The equity frontline indices continue to trade within the range, with three days down and two days of upside move. NSE Nifty traded in the 721 points range and finally closed with 156.15 points or 0.64 per cent decline. BSE Sensex is up by 0.12 per cent. The Midcap-100 gained by 0.43 per cent, and the Smallcap-100 is down by 0.84 per cent. On the sectoral front, Nifty IT gained 4.07 per cent and PSU Bank by 1.78 per cent. On the flip side, the Realty index is down by 3.19 per cent, and the Media index declined by 2.89 per cent. The Market breadth is mixed and in favour of declines. The India VIX declined by 6.95 per cent to 14.47. The FIIs sold Rs19,849.53 crore, and the DIIs bought Rs14,014.18 crore worth of equities.

The Nifty has formed another lower low and closed at the previous week’s low. It formed a long-legged, small-body candle on a weekly chart. It also formed a weekly bearish engulfing candle. The weekly volumes were highest in the last six weeks. This means that the index ended with just a 0.64 per cent decline, but the volumes were the highest. The big, bearish candles did not attract this much volume. The more distribution occurred in the last week.

The index has taken support at the 150DMA for two successive days during the week. It has tried to cross the 24,480-500 zone of resistance six times in the last eleven days. Currently, the 20DMA is also in this zone, which is in a serious downtrend. On a daily chart, the volumes were above average for the last three days, confirming the distribution. The Nifty also declined below the 5th August low, which is a major low. It formed a bearish engulfing candle on Thursday and got the confirmation for its implications on Friday.

With the above evidence, it is evident that the market has not come out of the bearish grip. In any case, the index closes below the 150DMA of 22,983, and the prior low of 23,816 will be seriously negative. As mentioned earlier, the 200EMA is the nearest and the strongest support, which is at 23,497 level. With this correction, the index will complete a little over 10 per cent correction. The index has met the 89 per cent target of head and shoulders pattern breakdown. On a longer time chart, the index also met the 100 per cent extension target of the prior major swing. These are some of the reasons for the correction.

Fundamentally, the earnings cycle has peaked as many companies downgraded future earnings and did not meet the street’s expectations. When the earnings cycle peaks, the price will also correct to a reasonable value. As of date, as many as 66 per cent of the Nifty-200 companies downgraded earning guidance. Even the PE ratio 23 is near the bubble territory (24-30) This earnings cycle may continue for another quarter. The current correction is fundamentally driven and may end only when positive earnings flow begins.

Technically, the 200EMA and 200DMA of the 23,532-508 zone will act as critical support. Watch the index’s behaviour around this level. If the index forms the bottom and breaks out on the upside, it will give a good bounce. A move above the 20-week average or 24,776 is the crucial resistance. At the same time, the index has multiple resistances around the 24,500-800 zone. The index must close above this zone to form a higher high. Only above this zone may the index get some positive directional bias.

Expect the index to move in the 23,800-24,500 zone for a period. Any fresh selling pressure will lead to a fresh breakdown, and the 23,500 can be tested. It is better to stay cautious as the earnings are not at expected levels.

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