Rising volatility in consolidation phase

The global equity markets meltdown as they witnessed intense selling pressure during the last week. The global benchmark indices are down by 4-5 per cent. The sell-off was triggered after the Federal Reserve decided to raise the interest rates by 75 basis points. The Indian stock market witnessed one of the worst weekly losses recently. The benchmark index, Nifty, closed with 908.30 points or a 5.6 per cent loss. The BSE Sensex lost by 5.2 per cent.

The broader index Nifty Smallcap-100 was down by 7.9 per cent and Midcap-100 lower by 6.2 per cent. All the sectoral indices declined heavily. The Metal index was down by 9.1 per cent, which led to the fall. The IT and PSU Bank indices decline by 8.2 per cent and 7.6 per cent, respectively. After hitting the 28.13 level, the India VIX is settled at 22.76 with a net rise of 16.25 per cent. FIIs sold aggressively during the week. They sold Rs7,818.61 crore worth of shares on Friday. In total, they exited Rs42,088.63 crore worth of equities. The DIIs bought Rs30,312.85 crore.

The Nifty opened with a very gap down on Monday and continued to fall the whole week. It registered one of the sharpest and most significant falls in recent times. The benchmark index Nifty closed at 53 week low. As we expected last week, our target of 15323 was achieved and formed an indecisive bar, an evening star. After declining almost ten per cent from the swing high, this candle formation shows indecision about further fall. As stated last week, the current fall is sharper and faster. It declined 1610 points in just 10 trading sessions. The earlier downswing was 13 per cent decline. As mentioned, the pattern target is at 14414, it may not reach straight away. There may be sharp upside rallies too.

Some of the frontline indicators are in an oversold condition and developed positive divergences. These indications show the downside is limited. If the fall continues, it may test 15082, at maximum. We can't expect a fall more than this at this juncture. A bounce from the oversold zone to up to the 13th June gap is at maximum. The gap area resistance is at 16178, Which is also at 61.8 per cent retracement of the current fall. The 20DMA is also at this level at 16187.

To reach this level, first, it needs to open the gap up on Monday and close above 15400 in the next two days. It has to sustain above 15563-800 zone on a weekly basis. There are several other resistances on the upside. The very short-term 5EMA is placed at 15584, and the 8EMA is at 15758. And Thursday's high of 16863 and Monday's massive gap down day high of 15886 are strong resistance areas now. In other words, the Nifty is to consolidate between the 15082 -15886 zone. In a bull case scenario, it may extend to the 16187 level at maximum. During this consolidation, expect an increase in volatility.

On a weekly chart, Nifty broke the channel support for the second time. But, this time, the whole candle has formed below the channel. It is also near the broadening triangle's support area. Notably, the index closed below the May-June 2021 consolidation or a base area. It also closed below the February 2021 swing high, from where the third counter-trend consolidation was formed in the March2020-October 2021 bull market. Interestingly, this counter-trend took support at the 14150 zone. This is where we are expecting the support again in the current bear phase.

The other reason for expecting a bounce from here is that the Nifty closed below the Bollinger lower band for the second day. Normally, this kind of over-expansion of the price will enter into consolidation before it resumes the prior trend. The expected consolidation is mostly within the previous week's range. With the above observations, avoid taking fresh shorts in the market and apply neutral-volatile strategies.

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