Nifty forms another Doji candle on weekly charts

For the last four weeks, the Nifty consolidated in a range. Last week, it traded in the 423-point range and closed with 71.30 points or 0.33 per cent decline. The BSE Sensex was down by 0.68 per cent. The Nifty Midcap index is up by 0.85 per cent, and the Smallcap is down by just 0.05 per cent. The PSU Bank index outperformed with a 5.1 per cent gain, followed by Pharma with 3.6 per cent. The Private Bank index declined by 2.3 per cent, and the FMCG index slipped by 2.3 per cent. The market breadth was negative. FIIs sold Rs.7,680.34 crore, and DIIs bought Rs.8,661.41 crore worth of equities this Month.

The Nifty broadly traded in a thousand-point range for the past eight weeks. After two weeks of decline, it went up by one week and consolidated in the last week. This is the consolidation we expected earlier. The index neither declined over five per cent nor moved further highs with impulsiveness. It has not closed below the crucial 10-week average. Last Month, it formed a perfect Doji candle, and after seven trading sessions, the price structure is another doji. These all-price action characters indicate nothing but a consolation.

Interestingly, during this consolidation, the volumes were highest after January 2023. If the consolidation is Stage 3, then the volume suggests the distribution. The Nifty already has four distribution days. If the distribution day count increases to six or more with a decline below the 50DMA of 21440, it will confirm the downtrend. Currently, the uptrend is under pressure. But, the 50DMA is strong support for the next week. On the upside, 22100-200 will act as a strong resistance zone. Widening weekly and daily Bollinger Bands indicates that the consolidation range will expand further. The coming days will be very tricky to trade as the volatility index India VIX spiked by 5.10 per cent to 15.45.

The weekly RSI (68.94) has formed a bearish divergence. Since 16th January, the daily RSI has struggled in the neutral zone and has registered failed attempts to enter the bullish zone. The weekly MACD line is flattened and the daily histogram shows an increased bearish momentum. The daily ADX (17.59) shows a decline in the trend strength.

For the next week, expect a minor retracement in the index. Banknify has improved its relative strength with Friday’s positive close. We can also expect the IT and Pharma sectors to play a defensive role. Be selective on stock selection.

The Relative Rotation Graphs (RRG) show that the Oil and Gas index is on top in the leading quadrant and may lose momentum. The IT, Metal, and PSU Bank indices were picking up their momentum in the leading quadrant with better relative strength. However, the Realty sector has lost its momentum and is on the verge of moving into the weakening quadrant. All other sectoral indices are in the lagging quadrant and may underperform next week. As mentioned above, stay with IT as the defensive sector plays.

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