Moderate pullback likely

The equity benchmark indices declined sharply last week and turned bearish. NSE Nifty declined by 518.10 points or 2.57 per cent last week. BSE Sensex also declined by 2.70 per cent. The Nifty Mid-cap and Small-cap indices are down by 1.69 per cent and 2.48 per cent. On the sectoral front, only the PSU Bank index gained by 3.35 per cent. The Nifty Realty was the top loser with 4.34 per cent. The FinNifty and the Metal index are down 3.89 per cent each. All other indices declined and closed with over a percentage point loss. The FIIs were net sellers during all sessions in the last week. They sold Rs18,261.39 crore in the current month. The DIIs bought Rs12.169.37 crore worth of equities. The market breadth is mostly bearish.

As cautioned earlier, the markets declined sharply last week. It closed just below the 20DMA, which means the process of means reversion is done. It signaled the short-term negative by closing below the previous week’s low. It retraced more than 50 per cent of the prior upswing. The declines were as sharp as possible, with higher volume. The trading range also increased to 537 points in the last week. On a weekly basis, the Nifty has formed the most bearish candle after June 2022 (points and percentage-wise). This is also a sharp decline after Feb 2023 (percentage-wise). All the sessions during the week closed with negative bias. It closed at the low of the week. Over 1,000-point rally in 11 days was retraced by 55 per cent in just four sessions. All the sessions during the week closed with negative bias. It closed at the lowest level of the week and below the last week’s low. The way it declined indicates the intermediate top is in place. We can assume that the 20,222 is high for the next few days or weeks.

The index is just 0.24 per cent above the 50DMA (19,626pts). The prior breakout level is at 19,584 points. The zone of support is very crucial for now. We see a short covering bounce next week. The next week, the month expiry is slated, and the price may influenced by rollovers. On the upside, the Nifty has to fill the gaps and close above the 20,222 decisively. Then, only a fresh breakout on the upside is possible. On the downside, a close below 19,584 means we are entering into a bearish phase and can test the recent low of 19,223 points.

The daily RSI declined below the 50 zones, and the weekly RSI is at 61.45 and formed a mild bearish divergence. The daily MACD has given a fresh sell signal. Weekly MACD is also about giving a bearish signal. The volatility index, VIX, is still below 11 and may result in more and more sharp declines. We cautioned about the dangers of low VIX regime repercussions. The VIX continues to be historically at the lower band for some more time, ultimately resulting in a black swan kind of event.

The Nifty IT index looks promising on the sectoral front, as it is nearing the leading quadrant. The Nifty Energy, Mid-cap 100 index, PSU bank, Pharma, Metal, PSE, and Infrastructure indices are inside the leading quadrant of the RRG chart. While sectors like Metal and Pharma are giving up on their relative momentum. We are unlikely to see any sector-specific dominance, but we may see highly selective and stock-specific performance coming in from different sectors. Even though the market structure has turned bearish, expect some pullback for the next 1-2 days. The next week’s price behaviour is crucial for future trends. Watch the 19,584-19,626 zone of support and the 19,850-20,000 zone as a resistance. Make sure that the trading position has strict risk management.

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