Charts Indicate Neutral To Positive Tone This Week

The counter-trend rallies or pullback rallies will sustain for the next 8 trading sessions maximum. Avoid a fresh, aggressive short position and wait for a reversal signal to take long positions for the near term

The domestic stock market witnessed one of the worst falls in its history. It declined by 5.89 per cent in February. NSE Nifty declined by 2.94 per cent last week, which is also one of the worst falls in the last five months. BSE Sensex is down by 2.81 per cent. The broader market indices, Midcap-100 and Smallcap-100, declined by 5.09 per cent and 5.99 per cent, respectively. The Microcap-250 index is down by 6.16 per cent. On the sectoral front, all the sector indices ended lower. The Nifty IT is the top loser with 7.96 per cent. The PSE is down by 5.90 per cent, and the Realty index is down by 5.52 per cent. The India VIX is down by 4.27 per cent to 13.91. The market breadth is extremely negative during the week. The FIIs sold Rs58,988.08 crore in the month. On Friday, they sold massively by Rs11.639.02 crore. The DIIs bought Rs64,853.19 crore during the month.

The Indian stock market has decisively entered into the Category-2 correction. The benchmark index Nifty fell by 15.88 per cent from the all-time high. The Nifty decisively closed below the rising trendline drawn from the March 2020 low. It declined sharply by 1.86 per cent with a massive volume on Friday and registered one of the worst falls in the last five months. As we suspected, the Nifty broke the crucial 22,250-350 support zone and formed a major lower low. The Nifty is 8.09 per cent below the 200DMA, which is the widest distance after June 2022. It closed out of the weekly and daily Bollinger bands, so expect some mean reversion.

In a truncated week, the Nifty opened with a gap down and consolidated in a tight range for the next two days. On Friday, with selling pressure in the broader market, the indices declined sharply lower. As the Index is in extremely oversold condition, expect a reasonable pullback rally. The Put-Call Ratio (PCR) also suggests that fall is now limited. As the Nifty declined for five consecutive months, the longest streak of fall in 28 years, may result in a temporary halt in the fall. The previous correction during October 2021 - June 2022 lasted for 8 months and had two positive months (pullbacks) in this period. The correction was 18.39 per cent. The current correction is five months old and corrected 15.88 per cent. As we entered into the Category-2 correction, expect the 25 per cent correction from the September 2024 high. Even if the correction stops at 18 per cent, after a pullback, the Nifty will almost test the 4th June low of 21281, which has the highest probability. A weekly close below this level means the Nifty corrects at least 25 per cent, which is at 19,800, and fills the 29th November 2023 gap. This correction will probably end in 8 months, i.e., by May 2025. If not, the correction will extend to 13 months or 21 months. All the previous corrections ended in these Fibonacci number of months.

As we are expecting the pullback from the current level, the Index may test the 20DMA or 50 per cent retracement of the last 17 days down swing, which are at 23,060, and 22,956. Only a decisive close above the 200EMA of 23,516 will give early reversal signals. Monday’s close will give a clue about the pullback rally.

The reason for the argument of pullback is that the RSI is below 25 after March 2020. This extreme oversold condition may sustain, has to come out of this zone. The +DMI is also at the lowest level, and forming a lower pivot is a reversal signal.

In a nutshell, the market is neutral to positive for next week, and the downside is limited. In any case, the correction continues and may halt at the 21,900 zone. On the upside, it protects the Friday low of 22,104; it may test Rs22500 and Rs22,956. The counter-trend rallies or pullback rallies will sustain for the next eight trading sessions maximum. Avoid a fresh, aggressive short position and wait for a reversal signal to take long positions for the near term.

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