Nifty likely to hover in consolidation mode

The equities closed negative in a truncated week. The benchmark index closed negative for the fourth consecutive week. It traded relatively in a narrow range of 229.15 points and finally closed with 116.85 points or 0.60 per cent decline. The BSE Sensex also declined by 0.60 per cent. The Broader market indices, Nifty Midcap-100 and Smallcap-100, ended at 0.1 per cent and 0.6 per cent lower. The Nifty Media and PSU Bank indices were top gainers with 2.3 per cent and one per cent, respectively. The Nifty Metal and Financials declined 2.9 per cent and 1.2 per cent, respectively. The market breadth is mostly neutral. The FIIs sold Rs10,925.84 crore, and the DIIs bought Rs9,245.86 crore worth of equities.

The NSE Nifty closed below the 10-week average after April. For the first time after February-March 2020, the Nifty registered a fourth successive negative closing. The fall may be smaller compared to previous declines; It indicates the market sentiment clearly and loudly. At the same time, the volatility index, India VIX, is also at a similar level of around the 10-13 zone. We have been cautioning about the dangers of a low VIX regime.

The Nifty declined below the 50DMA and 19,300 level of crucial support. It also declined below the Monday low and formed a lower low. On a weekly basis, the index has formed a long upper shadow candle and a bearish candle. It formed a fourth lower high candle, giving downside probabilities of the previous inside bar. It tested the support of 23.6 per cent retracement level (19,245) of the prior uptrend. The Weekly MACD is about to give a bearish signal, and the RSI is near the neutral zone. The daily MACD line is near the zero line. The daily RSI declined below the 45 support and got confirmation for its hidden negative divergence. If it closes below 40, expect more downside in the near term. The Nifty declined by 738 points or 3.69 per cent from its recent lifetime high of 19,992 points. The decline is not impulsive in nature, giving enough time to book profits.

The Metal, Pharma, Media, and PSU banks gained momentum as well as relative strength in the leading quadrant. The Realty index is losing momentum. The Bank Nifty and FinNifty remain in the lagging quadrant. Though the IT index is gaining some momentum, it is still lagging. The Auto, FMCG, and Consumer durable sectors lost momentum and moved into the weakening quadrant. This Relative Rotation data shows some improvement in sector rotation. Focus on Pharma, Metal, and PSU Banks. The stock-specific activity will be seen in the IT sector.

For the coming week, the Nifty is likely to consolidate within the range. In any case, the 50DMA support (19,302) for at least two days, the index may test the 20DMA of 19,572 points. A decisive close below 19,300 points, with higher volume, means the correction will continue. We may see more volatility in range-bound trading, and stock-specific activity will continue. It is important to keep the position size small and cut down the leveraged trades. Stay cautious with neutral to negative bias.

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