Charts Indicate Possible Rally Continuation

Key resistance is at 22668 (38.2% retracement) and 22749 (20DMA). A strong rally may extend to 22886 (50%) and 23103 (61.8%), but failure to reach 22749-22886 could signal a downtrend continuation

NSE Nifty ended its three-week declining phase. The benchmark index, Nifty, gained 427.80 points or 1.93 per cent, and the BSE Sensex is up by 1.55 per cent. The Broader indices, Nifty Midcap-100 and Smallcap-100 indices, outperformed the benchmark by gaining 2.66 per cent and 5.47 per cent, respectively. The Microcap-250 index is up by 6.71 per cent. All the sectoral indices closed on a positive note. The Metal index is up by 8.61 per cent. The Media and Energy are advanced by 7.36 per cent and 5.90 per cent. The Pharma and FMCG indices gained by 2.85 per cent and 2.37 per cent. The market breadth is improved. The India VIX declined by 3.16 per cent to 13.47. The FIIs sold Rs15,501.57 crore, and the DIIs bought Rs.20,950.89 crore worth of equities last week.

As we expected, the Nifty tried to come out of an extremely oversold condition. It rallied by 669 points or 3.05 per cent from Tuesday’s low. Even though the global markets were negative last week, the domestic market outperformed. As the Nifty registered a follow-through day, the trend changed to a rally attempt from a confirmed downtrend. It has not breached the 21,965 and made higher lows and higher highs for the past three days. The index has decisively closed above the 8EMA for the last two days. The 20DMA of 22,748 is the immediate target and resistance.

Before the rally, the index declined for ten consecutive days, which is the longest period in recent history. All the major indicators drifted into the extreme oversold condition. It is common for the price to retrace after a long period of bearish grip. The 38.2 per cent retracement level is at 22,668 level, and the 20DMA is at 22,749 points. This zone is crucial resistance for now. The counter-trend rallies can extend to 50 and 61.8 per cent retracement levels in the most bullish case scenario. This zone is at 22,886 and 23,103. If it fails to retrace towards the 22,749-886 zone, expect the downtrend to resume. A close below the prior day’s low is important for bears’ grip. On the downside, a close below 22,464 points, will be given a signal for a resumption of a downtrend. For a base formation, the index must not form a lower low below the 21,964. If the index breaks below 21,964 level, expect a deeper correction to be on the way.

The Broader index, Nifty-500, corrected 20 per cent and took support at a rising trendline drawn from the Covid crash low. The Midcap-100 and Smallcap-100 indices corrected 23.08 per cent and 27.47 per cent, respectively, from the all-time highs. The correction in the Microcap-250 index is 29.01 per cent, the highest in the thematic indices. In a nutshell, the broader market indices already completed the Category-2 correction. In 2008, the Midcap-100 index was corrected by 70.04 per cent, and in the 2010-12 period, it was corrected by 38.80 per cent. During the Covid crash, it corrected by 50.78. per cent.

The stock markets in Germany, Hong Kong, and Singapore are in a Confirmed Uptrend, indicating sustained positive momentum. South Korea, the UK, Mexico, and Taiwan are experiencing an Uptrend Under Pressure, suggesting potential weakness that could lead to a shift in market direction. Meanwhile, India, the USA, Japan, China, Malaysia and Indonesia are in a rally attempt, signaling early signs of a potential recovery that requires confirmation. The S&P-500 index already broke the Double-Top pattern. On the other hand, Canada, Thailand, and Brazil are in a downtrend, reflecting continued market weakness and caution among investors.

In a nutshell, the domestic market is in a crucial juncture. The earlier, the longer counter-trend rally is four weeks old, for twice the index failed to rally more than two weeks. So, expect a rally to continue for at least another week and to test the 22,749-886 zone in the most bullish case scenario. Next week’s close is crucial. Watch the 22,464-634 zone on Monday. Either side breakout will result in a sharp move. Still, the time has not come for accumulation for a long time. Stay vigilant on the price behaviour.

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