It’s Time To Wait For A Directional Bias

The 20DMA enters the downtrend, which is the major directional change after several weeks. The 10-week average is also flattened, which means the end of the strong uptrend

Equities traded nervously last week. NSE Nifty traded in a 539.70-point range, or 2.14 per cent, and finally ended with a minor loss of just 50.35 points, or a 0.2 per cent. BSE Sensex is also down by 0.38 per cent. The broader market indices- Midcap-100 and Smallcap-100- recovered by 1.26 per cent and 1.33 per cent, respectively. The Nifty Pharma and Auto indices were the top gainers with 2.11 per cent and 1.97 per cent. The Nifty Metal and PSU Bank indices are down by 1.78 per cent and 1.62 per cent. The India VIX declined by 6.42 per cent to 13.22. The FIIs were aggressively selling the equities. In just seven trading sessions, they sold Rs58,394.56 crore worth of equities this month. The DIIs bought Rs57,792.20 crore.

The Benchmark index, Nifty, consolidated after a 4.45 per cent fall in the previous week. The bears’ domination continued at the beginning of the week. It declined by almost a percentage point on Monday, and it mostly traded in this range in the next four days. The volumes were consistently declined. The Nifty tried to close above the 50DMA throughout the week, but failed. As we expected earlier, the consolidation may continue for the next one or two weeks before taking directional bias.

The 20DMA enters the downtrend, which is the major directional change after several weeks. The 10-week average is also flattened, which means the end of the strong uptrend. The expanded Bollinger bands indicate further consolidation until the bands’ contract. The weekly Bollinger bands already began the contraction. Now, the index is 2.03 per cent below the 20DMA. The index is now 4.77 per cent below the 30-week average. As stated earlier, the index was deviated far from the mean. Now, the consolidation is the sign of mean reversion. The 20-week average is at 24,541, a level that may be tested soon to complete the mean reversion. The behaviour around this level is very crucial for the trend and directional bias, so it’s important to pay close attention to it.

The Nifty is struggling to close above the 23.6 per cent retracement level, which is also similar to the 50DMA level. As mentioned above, a decisive close above the 25,068 will give an initial bullish signal. During last week’s consolidation, the low volume was characteristic of a counter-trend consolidation. The consolidation of last week may continue for another week. The weekly RSI declined into the neutral zone, and the MACD has given a fresh bearish signal. The daily RSI has been hovering around the 41-42 zone for the last four days, which shows no momentum. The daily MACD line is below the zero line. These are signs of weaker trend strength.

The Nifty is still moving in the rising channel. The recent number of 24,694 is channel support. If this support is violated, expect more intense selling pressure. A close below 24,694 will lead to the breaking of 20DMA and test the 24,049, which is a 50 per cent retracement level of the prior upswing. The 30-week average of 23,828 will be the strongest long-term support. We can’t project more than this on the downside.

Relative Rotation Graphs (RRG) show that among Pharma, Services Sector, IT, and Consumer Durables, only the Consumer Durable Index is showing strong and rising momentum. All other indices were losing their momentum. Expect these sectors will outperform. The Midcap-100 and Auto Indices are in the weakening quadrant. The Media index is in the Improving quadrant, but losing momentum. All other sectors are in the lagging quadrant. Some of them are improving their momentum. Barring Energy, PSE, other sectors are seen improving their momentum, and watch them for a better performance. The derivatives data shows that short positions were built up around the 25,000-100 zone, which may act as strong resistance. Avoid trading in the index for a moment and wait for a directional bias. Watch the stocks declaring 20 per cent growth in earnings.

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