Counter-trend consolidation may continue for some time

The domestic frontline indices recovered a bit on auspicious Diwali week. The NSE Nifty recovered by 245.15 points or 1.39 per cent. After two weeks of decline, this bounce is in the expected lines. The BSE Sensex gained by 0.8 per cent. The broader indices Nifty Midcap-100 and Smallcap-100 indices outperformed by 2.4 per cent and 1.2 per cent, respectively. All the sectoral indices closed higher for the week. Nifty Realty, up by 9.6 per cent is the top gainer. Followed by the PSU Bank index gains a 3.1 per cent. The market breadth has not improved much during the week. During the first week of November, FIIs sold Rs 686.85 crore worth of equities, whereas DIIs bought only Rs 343.82 crores.

The NSE Nifty traded within the previous week's range and formed an inside bar as we expected. It retested the psychological level of 18,000 last week. It is a common retracement after two weeks of sharper decline. This small bounce is a breather for the bears in the short term. Lack of faster retracement on the upside shows that the counter-trend consolidation will continue for some more time. The 18342 level is looking like a very strong resistance at the current juncture. Whereas the minor swing high of 18012 will act as very short-term resistance. The index is sustained below the 20DMA for the last six days. This key average flattened and indicated the sideways price action.

The 50DMA support is at 17,674 level, which may act as an intermediate support. The counter-trend consolidation may be prolonged one between 17674 - 18342 zone, before it takes a decisive trending move. The benchmark index has to break the 18,342 points resistance with a faster retracement. Such breakout will lead to a retest of the previous high of 18,604 points. In any case, the NSE Nifty breaks the 50DMA by adding distribution days, triggering a sharper decline towards 17452, which is a major swing low. Only below this level, the trend will decisively change into a downtrend.

The 38.2 retracement of the rally from the 28th July low is at 17,423 points. During February-April, the NSE Nifty retraced by 61.8 per cent of the prior intermediate upswing. The current retracement is also a little over the 61.8 per cent retracement level. In this scenario, next week's market move is critical and will be a decisive trend signal. In any case, the index fails to form a higher high, and it can test the 17452 sooner or later. The negative market breadth indicates the chances of consolidation for at next three-four weeks. Currently, the Nifty has five distribution days in the last 45 days. Any increase along with closing below the 50DMA will change the market structure as an uptrend under pressure. Two distribution days will expire next week. The RSI is declined below 50 and bounced to 50.82 in Muhurat trading.

The momentum is not at all positive for now. The negative momentum indicator -DMI is above the +DMI and about to crossover; the ADX is not a good sign for the market. The Mansfield Relative Strength is below the zero line indicates underperformance. Currently, it is better to wait for a clear market direction. For at least two to three weeks, stay light on position size and avoid aggressive leverage positions. Focus on stronger stocks to take moderate positions.

(The author is financial journalist, technical analyst, family fund manager)