Prefer low beta stocks for trading

Rising inflation concerns and downgrading of the GDP growth rate by World Bank dented the market sentiment. The profit booking was intensified and dragged many of the heavyweight stocks down. The benchmark indices closed lower all three days during the last week. The Nifty traded in the 337 points range and declined by 308.7 points or 1.74 per cent. The BSE Sensex also declined by 1.9 per cent. The broader indices, Nifty Midcap-100 and Smallcap-100 slipped by 1.3 per cent and 1.5 per cent, respectively. Only the Nifty Energy index closed with a 2.5 per cent gain. The Nifty IT and Realty declined the most with 2.9 per cent and 2.2 per cent, respectively. Overall, the market breadth is negative. The India VIX closed flat. FIIs sold Rs.10,762.38 crores, and the DIIs bought Rs.5772.11 crores this month.

As the benchmark indices slipped for three consecutive days, the Nifty has formed a big bear candle on the weekly chart. With this, the previous week's Doji candle got the confirmation to its bearish implications. As it formed, most bearish candle, with very tiny shadows, is a bad moment for the market. As we forecasted last week, it is confirmed that the 18114 is an intermediate swing high. The engulfing candle on Friday on the 20DMA support is another weaker signal for the market. The 50 DMA and the 200DMAs have been parallelly moving together for the past five days. By declining more than the 23.6 per cent retracement level of the prior upswing, the Nifty also confirmed the downswing. The Nifty is currently holding two distribution days. Comparatively, the volumes declined below average for the last one month, except for two-three days, and continue to decelerate. Any addition of distribution days and decline below 17165 will drag the market towards another swing low. In many ways, the 17400 support is crucial for the market now.

The MACD has given a fresh sell signal. On a weekly chart, the MACD failed to get a bullish signal. The monthly MACD is about to give the sell signal. The daily RSI closed below the prior swing low, and the monthly RSI declined from the overbought condition. There are no divergences visible currently.

The Elder impulse system has formed two consecutive bearish bars. For the second successive day, the Nifty added the distribution day, and presently there is a distribution count of two. Currently, the 50DMA (17165) is 1.75 per cent away. A close below 17165 and adding two more distribution days means the Nifty will enter into a confirmed downtrend. For now, 20 DMA (17471) is immediate support. In any case, the Nifty closes below this level; the next support is at 17181, which is also 50DMA (17165). In any case, the 50DMA cross under the 200DMA will be a clear bearish signal. With this technical evidence, it is better to avoid long positions.

As mentioned several times in this column, the dollar index has an inverse relationship. The Dollar Index (DXY) closed above the 100 level, which is a big negative for equity markets worldwide. FIIs are withdrawing the funds from the equity market because of the surge in the Dollar index. At the same time, other asset classes like Gold and Crude Oil are also rising to the new highs. The interest rate cycle also bottomed out, and then it is expected that the central banks across the world will raise the policy rates to contain the rise in inflation. These asset classes move against the equities. These are the indicators we need to watch of the next couple of weeks. In any case, the DXY moves above the 104 in the next few weeks, it is the caution on equities.

The other fundamental indicator, Price to Book Value (PBV), is at 4.63, reaching 12 year high. It indicates that the market is entered into bubble territory fundamentally. The PE ratio is at 22.92 levels. Because the calculation method changed, the PE came from the 40 levels in the Covid era, and we are not considering this as a factor for at least the next year. Historically, the Indian stock market corrections are limited to 13 or 21 months. The current correction is in its sixth month. In the next seven months, we may see a 25 per cent correction from the October top of 18604, which is almost equal to the 38.2 or 40 per cent retracement level (14000-14367) of the uptrend from March lows.

If the Nifty declines sharply next week, it may witness a sharp technical pullback. As long as it trades below the 17700, be with a bearish bias. The stock-specific activity will continue for the next few weeks. Prefer low beta stocks to trade and look for stocks declaring accelerated earnings.

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