Few bounces likely in oversold zone

After two weeks of resilience, the equity benchmark indices given up the gains as NSE Nifty closed below the important levels. It declined by 208.40 points or 1.06 per cent. BSE Sensex also declined by 1.3 per cent. The Small-cap index outperformed by closing marginally positive. The Mid-cap index also declined by 1.5 per cent. On the sectoral front, only the Nifty Auto index gained by 0.3 per cent. All other indices registered moderate losses. The Bank Nifty, FMCG, IT, and Metal indices closed with less than 1.5 per cent declines. The FIIs sold Rs13,411.72 crore, and the DIIs bought Rs11,883.80 crore this month. The market breadth is mostly negative during the week.

The benchmark index Nifty has formed a bearish candle and closed near the crucial support. The index is now below the 50DMA, and holding seven distribution days, meets the confirmed downtrend criteria. But the index is yet to form a lower low. On Friday day, it formed a Doji candle, which is indecisive. Now, the market is in a sell-on-rise condition. The 19,800-850 zone has acted as a strong resistance point, as we expected. Now, the Nifty is near the crucial 19,233-500 support zone. There are multiple supports within this zone. The index has been in the over-sold condition in the lower time frame. We may see some bounces to come out of the oversold zone, but it is temporary. We can assume that the 19,850 is the short-term lower high. The Nifty has to decline below the 19,333-233 to form a lower low.

The Nifty closed just 0.54 per cent above the 20-week moving average at 19,437 points. Recently, this important medium to long-term average acted as support. If it closes below this, the market will receive warning signals on the downside potential. The weekly RSI has already broken the Double-Top pattern and declined from strong bullish to neutral zones. The weekly MACD is now below the zero line, which is another bearish signal. The price pattern shows that the upside is limited to the recent swing high of 19,850 points. Expect volatile moves as the monthly derivatives expiry is scheduled in another three days. We may see testing of crucial supports with sharp bounces as the rollovers pick up. If the Nifty declines below 19,233 points, we will see intensified selling pressure and more weakness.

The India VIX is still at near the historical lowest level. Last week, it rose by just 1.88 per cent. The CBOE VIX is up by over 12 per cent and indicates the troubled times ahead. The Dow and S&P500 indices closed below the previous week’s lows. All other global indices are also below their lower levels. In these conditions, the investors focus on safe-havens. e.

Relative Rotation Graphs (RRG) indicate that the Nifty IT, Energy, Midcap-100, Media, PSU Bank, PSE, Metal, and Infrastructure indices are inside the leading quadrant, but are losing their momentum and relative strength. The FMCG, Consumption, Financial Services, and Bank Nifty are inside the lagging quadrant. All these sectors are improving their relative momentum, as appears from the trajectory of the tail.

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