Nifty forms Bearish Engulfing amid rising volatility

The breadth is shrinking. And over two-thirds of stocks are trading above long-term averages, which is another indicator of market heat

The equity market didn't sustain at a life-time high opening and closed in the negative zone. The Union Finance Minister's stimulus package did not enthuse the traders in the last 30 minutes of trade. The Nifty finally ended at 15,814.70 with 45.65 points decline. The Bank Nifty declined by just 5.20 points as the PSU Bank index supported by advancing 2.4 per cent. The Nifty Pharma and Metal indices inched up by 1.27 per cent and 1.28 per cent. The broader indices Midcap-100 and Smallcap-100 indices up by half a per cent. FinNifty, IT, Media, and Energy indices declined by half per cent. The VIX is still below 14. The market breadth is slightly positive as 1064 advances and 898 declines.

The Nifty formed a bearish engulfing after opening at a new life-time high of 15,915 points. It declined by 100 points from the day's high. In the other way, Friday's Hanging Man got the bearish confirmation. As the bears failed to dominate the market no more than two days during the last month. Even the biggest declines also failed to get a follow-through day. Today's bar is also a bearish belt hold. Let's wait and see, will the bears take the control this time, the engulfing formed at an all-time high, which will have more validity. In any case, the Nifty closes at least one per cent below the 15,790 points, and then the bears may get control of the market.

The volume further declined to the lowest level after November 14. The momentum is not picking upside, and the flattish move gives no clue for either side. The Mid and Small-cap stocks are outperforming the broader market. These two thematic indices were at their new highs after 2018. In the past, all bull markets matured when the Small-cap stocks outperformed the markets. This time may not be different. The breadth shrinking. And over two-thirds of stocks are trading above long-term averages, which is another indicator of market heat. The RSI declines from the sloping resistance line. The 20DMA is at 15,733 points, and the Bolling Bands came very closer after November 2020. At the current juncture, either bulls have to make a sharp upside move at least one per cent above the 15,915 points, or bears have to drag the market below 15,700 points with a higher volume. At the same time, any bearish move needs to sustain at least three days and move down sharply. It is a time to be cautious on either side.

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