RSI indicating a bearish divergence

The equity benchmark indices traded with high volatility in a truncated week. NSE Nifty gained just 55.9 points or 0.25 per cent. The BSE Sensex is also up by 0.20 per cent. The broader market indices, Nifty Midcap-100 and Smallcap-100, advanced by 0.61 per cent and 0.26 per cent, respectively. The Nifty Auto index is the top gainer by 1.94 per cent, and the Media index declined by 3.13 per cent. The Nifty IT continued to decline by 2.25 per cent. The advance-decline ratio is neutral. The India VIX is up by 33.80 per cent to 14.62. The FIIs sold Rs35,692.19 crore worth of equities last month. The DIIs bought Rs44,186.28 crore.

The General Elections are around the corner, and the market behaviour has changed. With increased volatility and the daily ranges, the market is not giving any clear signal, with erratic behaviour. The declining days attract more volumes, and the advancing days are thin volumes. This behaviour, high volatile and erratic move, is normally seen in Stage 3, which is the distribution phase. The reason for this is event risks like elections, geopolitical tensions, and several central banks’ policies in the next month.

The Nifty has formed a perfect Gravestone Doji candle, closing exactly where it opened. During the truncated week of four trading sessions, the index achieved new lifetime highs twice. However, there is a notable difference between the earlier highs and the latest four all-time highs. The Lifetime highs from 15thJanuary exhibit the characteristic of higher highs. In contrast, the latest four all-time highs of the 9thand 10thof April and the 30thand 3rdof May appear to be parallel highs. The index has formed highs, but the RSI has formed lower highs, indicating a bearish divergence. This bearish divergence is a continuation of the 15th December high. Despite the RSI’s attempt to negate the bearish divergence during the second week of April, it was unsuccessful, warranting caution and attention to potential market trends.

Historically, the price discounts all information before the outcomes. Unstable governments are not suitable for the market. During Elections, volatility will increase. On many occasions, the pattern breakout will occur. The markets at new highs were only in 2004 and 2019 before these elections.

The recent Federal Reserve and other central bank policy decisions clearly show that the interest rate hike cycle has ended. All the banks were waiting for conditions to reduce interest rates. The most probable is that this calendar year, there may be some rate cuts domestically and globally, which may boost the markets.

As the market is at high, if the election results are not up to the expectation, expect a knee-jerk reaction of 10 per cent correction. Even if the same BJP-led government forms a full majority, the market may fall after some time because it is already discounted. All in all, expect some knee reactions on both sides soon after the election results.

For the short-term view, for the next 4-5 weeks, the Nifty may consolidate further, with a neutral bullish bias. As long as it does make a lower low and a close below 21,777 points, we can’t be strongly bearish. The Nifty took support at a 10-week average of 22,339 points, which is the strongest near-term support. Only with a break below this level will the probability increase to test the prior low. The current rising channel’s mean level and last week’s low are also at a similar level of 22,339-22,348. In any case, the Nifty closes below this support, and the 50DMA of 22,292 points is the next strong support. For an upside move, the Nifty must close above the 22,510-22,600 zone of resistance.

Last week, the India VIX rose over 34 per cent, which was an indication of a more volatile move. The Nifty may move four per cent on either side in the next four weeks. The derivatives data shows 22,000-23,000 are the support and resistance for now. The high volume declines are a concern now. After a 446 points move on Friday, expect an inside bar on Monday. At the same time, the Monday’s close will give clues for the next week’s probable move.

The Relative Rotation Graphs show that only the Nifty Metal index has stronger relative strength and momentum. Though the Auto index is also in the leading quadrant, it is losing momentum. The Consumer Durables index has gained momentum and relative strength and may enter the leading quadrant next week and outperform the Nifty-500 index. The Bank Nifty and FinNifty are also in the improving quadrant and need to improve their momentum. All other sectoral indices do not have good strength or momentum.

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