Nifty on cusp of trend reversal confirmation

NSE Nifty ends flat after moving near an all-time high. The benchmark index gained at the beginning of the week, but the intensified profit booking in the last two days erased the gains. The Nifty gained just 29.3 points or 0.16 per cent. BSE Sensex also ended flat with a 0.13 per cent gain. The broader indices outperformed as the Nifty Smallcap-100 and Midcap-100 advanced by 1.17 per cent and 0.55 per cent. On the sectoral front, the Nifty Auto and Energy indices were the top gainers with 1.65 per cent and 1.61 per cent, respectively. The Nifty IT and PSU Bank indices were the top losers, with 3.32 per cent and 1.41 per cent. The Market breadth was not so strong and turned negative in the last two days. FIIs bought Rs240.78 crore, and the DIIs also bought Rs3,010.54 crore worth of equities this month. The India VIX remained flat below the 12 zones.

On weaker market internals and low VIX, the benchmark index has formed the second-highest level in its lifetime. The relative strength and the momentum completely waned. Interestingly, Nifty has been rising on a declining relative strength for the last one month. There are several other negative divergences, and the bearish patterns formed and negated in the last two months. Last week’s price action has not confirmed the possibility of going higher levels to an all-time high, as it formed a bearish Shooting Star candle. Historically, there were incidents of reversal whenever the index formed a bearish candle at a swing high. At the same time, the price did not confirm the probability of declining. In other words, the domestic stock market is at an important juncture.

The Volatility Index India VIX remained flat at the historical lows of below the 12 zone. Prolonged low volatility days will not sustain for a long time. The benchmark index forgot to move in divergence with the VIX. Both VIX and Index move together in a similar direction, discrediting the historical fact. Any spike in VIX to above 14 will result in a sharp decline in the index.

The Nifty has formed a candle similar to the bearish engulfing on Thursday and got confirmation for its negative implications. The 7-day flat base breakout on Wednesday failed to continue its momentum and registered a failed breakout. As it closed below the 8EMA and closed below the previous day's low for two consecutive sessions, it has given an initial sign of reversal. 29th March, it has provided a breakdown signal. The 20DMA acted as a support line during the 46-day uptrend, which has three flat bases. A failed breakout is enough to conclude that the trend has reversed. It must form a lower swing low, which is a recent base low of 18,464. The 20DMA is also at a similar level of 18,443.

The RSI is on the 60 line, and a decline below 56 will confirm its negative divergence implications. Weekly RSI has been flattened for the last two weeks. The MACD has given a fresh sell signal. The commodity channel index shows that the index is at its short-term top. Only four sectoral indices, Realty, Auto, Private Banks, and Healthcare indices, are in the leading quadrant. But Healthcare and Private sector bank indices are losing momentum. The Metal index is gaining momentum. All other sectors are not in a position to lead the market. As the earnings season and the monetary policy events are over, no major trigger points are available now.

When the markets are trading at a new high with no momentum or relative strength, it is not the time to take fresh exposure to the market. As long as the Nifty trades above 20DMA 18,443 points, do not be bearish and wait for a reversal confirmation. The existing portfolios need to be evaluated with the aim of protecting the profits. If the market gets a confirmed reversal signal, better exit the significant chunk of the portfolio.

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