Indicators show rise in bearish momentum

In a nutshell, watch the opening hour on Monday. If the index trades below the first hour’s low, avoid taking long positions. As the monthly derivative expiry is scheduled, cut down the highly leveraged position. Huge swings can hurt the Option positions very fast. As the VIX rises again, expect more volatile days

Equities witnessed huge volatility last week. All sectoral indices closed negative, reflecting selling pressure in the broader market. The Nifty traded in a 649.80-point range and finally declined by 372.40 points or 1.65 per cent. The BSE Sensex was also down by 1.56 per cent. The Midcap-100 and Smallcap indices were down by 2.74 per cent and 1.37 per cent, respectively. The Nifty IT index is the top loser with 4.71 per cent, followed by the PSU Bank index with 3.68 per cent. The Market Breadth is primarily negative. The India VIX is up by 16.69 per cent to 13.45. The FIIs sold Rs22,229.49 crore, and the DIIs bought Rs21,268.96 crore in this month.

The Benchmark index, a key indicator of market performance, finally closed below the 10-week average after the first week of November 2023, a significant event in the market’s recent history. This event is crucial as it indicates a potential shift in market dynamics. It also closed below the 50DMA. Currently, the index is holding four distribution days. A decline of 4.38 per cent in the last five is the sharpest decline after January. But, this time, the index is below the 50DMA and the 10week average. Importantly, last week’s shooting star or counterattack bear candle gets the confirmation for its bearish implications, as the index closed below the previous week’s low.

After the March 2020 low, all the minor swings are 2.5 per cent to 4.85 per cent. During the current rising channel, the Nifty had four minor down swings with 4.46 per cent, 3.62 per cent, and 4.38 per cent. These minor swings are sharper, as all declines were limited to 4-8 days. But the rising swings consumed more time and had less volume. This is the reason we are comfortable with the current price structure. The erratic and high volume declines in the rising channels characterise Stage 3 and distribution.

A 400-point bounce on Friday from the rising channel’s demand line is much anticipated. The Nifty has yet to form a lower low. The prior swing low is 21710, the 100DMA is at 21729, and the 100EMA is at 21639. This 21639-729 zone of support is crucial now. If the Nifty forms a new swing low below 21710, the market enters a downtrend. A close below 21639 will confirm the downtrend. The index is able to close above the 20-week average after a decline for a brief period. The weekly and daily Bollinger bands are contracting, which indicates the index is in mean reversion mode. Interestingly, within the rising channel, the index also formed a megaphone pattern if we connected the prior two lows and two highs. Normally, the megaphone at the lifetime high signals the topping formation.

The weekly RSI closed below the prior lows and got confirmation of its negative divergence implications. Last week’s high volume declines with bearish divergence indicate a probable downside move. The daily RSI bounces from the 40 support and avoids entering the bearish zone. Historically, the 40-45 was the support zone for nifty. Whenever it declines below this crucial support, the markets are in a downtrend. The weekly MACD also shows an increased bearish momentum.

Global risks were intensified last week. The Nasdaq-100 declined by over two per cent on Friday. The NVidia declined by 10 per cent, and SMCI was down by 20 per cent. Several blue chip companies were closed below their critical supports. The Tesla closed at a 15-month low. Most importantly, the Dollar Index (DXY) is back to above 106 levels, which has an inverse relationship with equities. At the same time, the domestic market’s heavyweight stock, HDFC Bank earnings, were not as encouraging as market expectations.

In a nutshell, watch the opening hour on Monday. If the index trades below the first hour’s low, avoid taking long positions. As the monthly derivative expiry is scheduled, cut down the highly leveraged position. Huge swings can hurt the Option positions very fast. As the VIX rises again, expect more volatile days. The event risks, Geopolitical tensions globally, and General Elections domestically will have a high impact on the market. Try to be sideline till the dust is settled.

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