Charts Indicate Bearish Bias

NSE Nifty declined for six straight sessions. In a truncated, four-day week, the Nifty traded in the 852-point range and declined by 615.50 points or 2.55 per cent. The BSE Sensex is also down by 2.4 per cent. The Midcap-100 and Smallcap-100 indices declined by 4.1 per cent and 4.6 per cent, respectively. On the sectoral front, Only Nifty IT is up by 0.8 per cent. The Nifty FMCG, Metal, and PSU Bank indices are down by 4.5 per cent to 5.2 per cent. Market breadth is negative. The India VIX is up by 2.11 per cent to 14.77. The FIIs sold Rs.29,533.17 crore, and the DIIs bought Rs.26,522.32 crore worth of equities.

The Nifty sharply declined and closed at its lowest level after June 24. It declined below the 200EMA and 200DMA after April 3, 2023. The current fall is seven weeks old, including one Harami candle. Last week’s fall was severe compared to the previous two weeks. But it was with a lower volume after April. The index also formed a Doji candle at 200DMA, indicating an exhaustion of selling pressure. The index bounced from the 200DMA earlier on many occasions. Next week’s close is essential for the market direction. It must bounce above the 200DMA to end the downtrend. Next week is also a truncated one with four trading sessions. Global institutional investors CLSA and Moody’s upgraded the Indian markets and gave overweight last week in view of Trump’s anti-China stance. These reports may boost sentiments temporarily. The index may witness a dead cat bounce towards the 8EMA of 23,915 points. This is nothing, but a test of prior parallel support, which can become resistance for now.

The Nifty is now trading just 1.20 per cent above the 50-week average, which is at 23,253 poins. In the bear case scenario, the index may test this level next week. The Nifty is trading 5.47 per cent below the 50DMA. The longest distance was above five per cent after June 2022. Importantly, the index is out of Bollinger bands for the second day, which is an indication of an extended fall. It must come into the bands sooner or later. The earlier bounces were limited to 2.19 per cent and 3.03 per cent. These bounces were short-liver for just two days in the six-day consolidations. If the index bounces three per cent this time, it may test the 20DMA of 24,246 points in the most bull case scenario. As the mean reversion is completed, this may be a most auspicious one.

The fundamental news is as good as expected. The inflation is at a 14-month high, and rate cut hopes have receded. The FII net selling continued for the 33rd session in a row. They sold Rs2,69,011.48 crore in this year. The earnings were disappointing in Q2. There were many downgrades. The Dollar index and US 10-year yields are rising, which have a direct inverse relationship with the equities. This means the FII outflows may continue to the US markets. With this, any bounce may not be a sustainable one unless earnings upgrades and surprises.

The daily RSI (29.69) reached the oversold zone, and the weekly RSI (43.26) is near the bearish zone. Historically, the 40 zone has acted as support many times. There are no divergences in any timeframe. The weekly and daily MACD shows strong bearish momentum.

In this scenario, a further downside will result in testing a 50-week average of 23,253 points. It is wise to project more than this for now. The broader market indicates weakness, as the mid- and Small-Cap indices declined the most, there is a possibility of dead cat bounce. In any case, the Nifty closes below the 200DMA for next week, too, which means the market entered into a long-term bear trend and can sustain for at least 8-13 months. Stay cautious even during a pullback rally.

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