Charts Signal Range-Bound Trading This Week

For the fourth straight week, the benchmark index closed registered a decline. NSE Nifty was down by 2.71 per cent, and the BSE Sensex declined by 2.24 per cent. The Nifty Midcap and the Smallcap indices are down by 5.75 per cent and 6.45 per cent, respectively. All the sector indices closed lower. The Nifty Metal is the top loser with 7.23 per cent, followed by the Realty index with 6.97 per cent. The Banknifty, Pharma and FMCG indices are down by 3-5 per cent. The India VIX is up by 12.23 per cent to 14.63. The market breadth was extremely negative. The FIIs also sold equities aggressively this week. They have sold Rs100,242.17 crore this month to date. This is the highest monthly selling figure in the FII’s history. The DIIs bought Rs97,090.83 crore.

The overstretched market continued the correction for the fourth straight week. As we cautioned, the Nifty has moved far away from the mean levels and will experience mean reversion. This is precisely what is happening now. The Nifty closed decisively closed 2.11 per cent below the 20-week average. After the Covid Crash, the index registered the worst fall this month. The index is clearly in a downtrend, as it formed lower highs and lower lows, trading below its key moving averages with five distribution days. These are all characteristics of a confirmed downtrend.

The Nifty met the 61.8 per cent extension target of the head and shoulders pattern breakdown. It has already met the right shoulder breakdown target. The index declined by 8.39 per cent from its all-time high, the highest fall after November22-March 2023 fall. As we stated earlier, the Category-1 correction of 10-13 per cent is due for a long time. Many company’s earnings were not met the market estimates. As the earnings negative surprises continue, they will reflect the price action. The correction may continue for at least another quarter. For now, for all practical purposes, the all-time high of 26277 is the top for the market.

The Nifty is trading 3.77 per cent below the 50 DMA. The Bollinger bands are in the downtrend. The important technical development is that the 20DMA crosses under the 50DMA, which is an intermediate bearish signal. The index is also below the 100DMA, which acted as strong support earlier. The nearest support is at 150EMA of 23867. The 50 per cent retracement level of the prior upswing is at 23,779. The head and shoulder pattern breakdown target is at 23,651. So, this support zone (23,651-23,867) may be tested or violated sooner or later. The 200DMA of 23,380 will tested once this support zone is breached. With Category-1 (10-13 per cent) correction will be completed. Expect the market to be in a downtrend till December-January.

Expect the pullbacks or counter-trend consolidations of 2-4 weeks in the process. The daily RSI (28.61) may try to come out of the oversold zone. But, the indicator may sustain in the oversold condition for a period, like it was in the overbought condition recently. The immediate resistance is at 24558, which is 8EMA. Only above this level is there a possibility of testing the 20DMA of 24,991.

The Midcap-100 and Smallcap-100 indices were already corrected by over 10 per cent. A majority of the stocks in the Nifty-500 are below their long-term averages. Many stocks which gave multi-bagger returns have corrected by 30-50 per cent now. If the correction continues, these stocks may correct over 60-75 per cent from their all-time highs.

Relative Rotation Graphs (RRG) show that the Nifty Services Sector, Pharma, Consumption, and IT indices are inside the leading quadrant. These sectors are losing momentum but may continue relatively outperforming the broader markets. The Metal, Bank Nifty, Healthcare, and Consumer Durable indices are in the improving quadrant, with better momentum. These may show some resilience compared to others. All other sectors do not have good Relative Strength and momentum.Expect a rangebound trading next week as it is a truncated one. The festive mood may result in a decline in volumes.

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