Lower volume, lower volatility are major concerns

The equity benchmark indices witnessed a roller coaster ride during the week amid volatile global cues. The NSE Nifty closed at 16,450.5 points with a 78.60 points decline or 0.5 per cent.

The BSE Sensex declined by 0.2 per cent. The broader market was worst hit, with the Nifty Smallcap-100 declined by 3.4 per cent, and Midcap-100 down by 1.7 per cent. On the sectoral front, FMCG and IT indices are the only gainers with 4.8 per cent and two percent respectively.

The Nifty Metal index is down by eight percent. All other sector indices are down by 1.5 percent to three percent. The market advance-decline ratio is negative even on the positive days. During the last four trading sessions, the FIIs sold Rs4,314.4 crore, and DIIs bought Rs162.45 crore worth of equities.

The Nifty hit 16,700 level, which surpassed our target; however, the profit booking dragged the index to a lower level. On the weekly chart, it formed a bearish shooting star candle. It added a distribution day count on Friday and reached a total count of four.

As the Nifty recovered over almost 150 points from the low, the net loss is limited on a weekly basis. After 14th February week, the Nifty has formed the most bearish candle. As mentioned in the previous columns, The lower volume and lower volatility are the major concerns.

The market is hitting new highs, but volume is declining week by week. The volumes are lower side since the beginning of this financial year.

The Nifty is exactly reacting from the upward channel resistance drawn from the low on April 22. At the same time, it opened with a gap on Friday and closed unfilled. This gap is going to be very, very crucial for the near future. Only a move above 16,535 points is positive and will continue the positive move. At the same time, Friday's low 16,376 is a very crucial support for the market.

A break below this level is critical will retest the recent two-month-long consolidation breakout level of 15,900 points. This is the most probable target in the short term. The most important concern is the underperformance of the broader market. The Midcap-100 and Smallcap-100 indices are declining for the last three weeks by four-five percent. The much broader index Nifty-500 formed a hanging man candle last week, almost engulfed this week, with a shooting star kind of a candle.

Importantly, the Bank Nifty is failed to form a new high after February. At the same time, barring IT, FMCG all the other sectoral indices are losing their relative momentum.

These two sectors outperformed the broader market. These divergences and lack of leadership are the main concerns now to sustain at the higher level. The advance-decline line is also a big worry point now. Even in the S&P-500, the AD line is showing the bearish possibilities for the global equity market.

In the previous, I mentioned the Dollar index and its inverse relationship with the equity market. Now, the Dollar index has broken out of a double bottom pattern which is very bullish. On Friday, It retraced a bit after three days of sharp movements. If the Dollar index is moving further high, the emerging markets may witness FII withdrawals. India is already witnessing for the past two-three months.

There is another fact that the volatility is at its historically low levels. This key indicator also has an inverse relationship with the index. The low volatility may lead to a storm kind of a move in the market.

Even the other derivatives data suggests the market is going to witness higher range bars with increased volatility. It's a caution for the bulls. As the August derivatives series expiring this week, it is better to be with a cautious approach.

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