Nifty forms bearish candle Shooting Star

Geo-political tensions continue to weigh on the stock markets across the world. Equity market sentiment dampened further and the benchmark indices closed at the lower levels. The NSE Nifty traded in 682 points range and finally closed with 413.05 points or 2.48 per cent lower. The BSE Sensex also declined by 2.7 per cent. The broader market indices-- Nifty Midcap-100 and Smallcap-100—fell 1.6 per cent and 0.4 per cent, respectively. The Metal index is a top performer with seven per cent gain and the Energy index is up by 3.8 per cent. The Auto in suffered the most with nine per cent decline. The FinNifty and Bank Nifty eased 5.5 per cent each.

The market breadth is negative for a whole week. FIIs sold Rs18,735.61 crores worth of equities in three trading sessions of this month. Last month they sold Rs45,720.07 crore. DIIs bought Rs12,599.93 crore in the last three days. The Nifty broke down the Double Top pattern by closing below the 20th December low. As the legendary investor Warren Buffet said: "Sell on Double Top and buy on Double Bottom." With the Double Top already confirmed the long-term downtrend, it is better to sit aside and wait for a Double Bottom to form. As long as there is no bottom base formation, no new purchases are advised. It is better to protect the capital by staying on the sidelines than taking the risks.

The Nifty closed below the 16410 level and closed at the downward channel support. It is also a very long-term 50-week moving average, currently at 16564. The index also closed below the 200 Exponential Moving Average (16712). The index has also formed a bearish candle, a Shooting Star. Apart from closing at the support, the Nifty also retraced 100 per cent of the ABCD pattern.

More than six distribution days and trading below the 50DMA and 50WMA are the long-term downtrend signal. The Nifty has declined 13.28 per cent from the October 2021 top and entered the category-2 correction, which may lead to correction up to 25 per cent from the top. All the levels mentioned above are acted as a support earlier. But, now, they have become resistance, as per the basic technical analysis principle. With this, the 16410, the prior low, and the 16712 (200EMA) will act as a crucial resistance zone for the near term.

The market breadth has been negative for the past few days. Any kind of short-covering led rally attempt must cross the 16712 level. To form a minor high, which is important for trend reversal, the Nifty has close above 16815. The fear index or volatility index, VIX testing 30 zone for several times. It closed at 27.96 with a 4.55 per cent rise last week. As it reached a two-year high, expect the market to trade with more intraday swings.

As mentioned in the past columns, the head and shoulders and other pattern target are placed at 15250. Before that, the Nifty may take support at 15986, as it is a 23.6 per cent retracement level of the March 2020 - October 2021 rally. From this level, any bounce maybe just because of some short-covering only. These pullback rallies generally do not sustain for a long period. Another important observation is that the 40-week moving average will now become resistance, which acted as support in December.

The 40-week average is placed at 17007. On a weekly chart, the MACD has reached very near to the zero line, and the histogram shows an increased bearish momentum. The rise in ADX in daily and weekly charts is an indication of strengthening bears. The RSI closed at the lowest level after May 2020, and on the 40 zone. This leading indicator is forming a series of lower lows, and lower highs are a sign of a strong downtrend. For the last two weeks, the Heiken Ashi candles show a strong bearishness and below the 8MA is also a bearish indication.

With this technical evidence, the market remains weak. There is a huge number of short positions built up in the system. The fresh short positions will attract a higher risk without strict stop losses. Any technical or short covering will hurt the positions. The market is not conducive to building a portfolio now. Keep in the sidelines and protect the capital.

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