Mkts losing steam amid weak global cues
After a fall of 6.85% the pullback is normal; The target for the present correction is around 18,525 points in the near term, which is a 50% retracement of the prior uptrend
image for illustrative purpose
The equity markets witnessed one of the worst falls last week. NSE Nifty closed at 19,047.25 points with a net loss of 495.4 points or 2.53 per cent. BSE Sensex was down by 2.47 per cent. The broader market indices, the Nifty Midcap down by 2.95 per cent and the Smallcap index fell by 2.23. per cent. All sectoral indices closed lower last week. The Nifty Media is the top loser by 5.36 per cent, followed by the Metal index with a decline of 3.87 per cent. The market breadth is negative. The FIIs were aggressive last week. They sold Rs26,598.73 crore in October. The DIIs bought Rs23,437.14 crore worth of equities. The volatility index, India VIX, traded in a huge range between 8.82 and 12.70 and finally ended at 10.90.
The Nifty has registered one of the worst declines last week. It closed below the 31st August low and formed a major low. The current fall of 6.85 per cent from the top will be limited to category-1 (10-13%) correction, or will it extend to category-2 (25-30%) correction. After March 2020, all the corrections were limited to 3.84 per cent to 18.39 per cent. Only fall during October 2021-June 2022 met the category-1 correction. All other corrections were short-lived. The current correction of 6.85 per cent is sharper among all the corrections, which was in just six weeks. Whenever the market rallies over 100 per cent from the bottom, it normally corrects 25 per cent. Major corrections in the world markets are limited to category-1 and category-2 corrections.
After a fall of 6.85 per cent, the pullback is normal. The target for the present correction is around 18,525 points in the near term, which is a 50 per cent retracement of the prior uptrend. In any case, Friday’s pullback extends, and the index may test the 19,225-19,343 resistance zone, which has 38.2 per cent and 50 per cent retracement levels. We can’t expect more than this now. The previous downtrends formed at least three lower tops and lower bottoms. If the Nifty forms another two lower tops and lower bottoms, we can expect the 18,125 (61.8% retracement level) to be the high probable target, which is an 11 per cent correction from the top, met the category-1 correction.
The Nifty tested the previous high (October 2021) and achieved its throwback. It declined by 1384 points from the top and erased all the breakout gains. It tested the 23.6 per cent retracement level of the prior downswing. The Nifty closed above the 30-week average or 150DMA last week after a sharp decline below these long-term averages. It registered one of the worst declines in recent times. The index is 2.47 per cent below the 20DMA and 2.76 per cent below the 50DMA.
The weekly RSI (48.17) got the confirmation for its negative divergence at the top. The MACD shows an increased bearish momentum. The -DMI is above the +DMI, and the ADX is clearly declining, which is an indication of bear domination.
We keep on alerting about the prolonged low VIX regime. The VIX declined to the lowest 8.82 level and bounced 20 per cent on the same day. It is still below 11, and the utmost alertness is required. The CBOE Index also sustained a breakout for the second week. The global market indices, Dow and S&P-500, declined below the previous major swing low. The 10-year US Bond yields also rose to five per cent, its highest level after 2007-08.
The Nifty holds eight distribution days and formed the lower low. It is also below the 50DMA, which is the character of a confirmed downtrend. With limited upside, there is more downside possibility. Only in the case of a flat base formation and a breakout with volume support will reclaim the relative strength. As the global markets are weaker, it is advised to be very highly cautious next week.
(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)
