Avoid high leveraged positions

The equity market has finally moved in decisive direction in a truncated week. The benchmark index Nifty moved 435 points in the last two trading sessions and gained 414 points or 2.45 per cent. BSE Sensex also gained by 2.55 per cent. Midcap and Smallcap indices advanced by 1.59 per cent and 0.79 per cent, respectively. All the sectoral indices closed with gains. The Nifty IT and Metal indices were the top gainers with 2.73 per cent and 2.32 per cent respectively. During the last month, FIIs bought Rs1,997.70 crore, and the DIIs bought Rs30,548.77 crore worth of equities. The market breadth was improved during the previous two days. The VIX is down by 15.12 per cent to 12.94 during the last week.

The Nifty has negated the negative closing for the fourth consecutive month. It manages to form a perfect Doji candle on a monthly candle. Historically, the Nifty never declined for four consecutive months, even in the most bearish year. On a quarterly chart, it has formed an inside bar. As we expected, the ten-day base, or a Double Bottom broken with a gap opening and a strong bull candle. During this base, the index took a support at the downward channel demand line. It closed above the previous week’s high, which is a big positive sign for the directional view. Importantly, the index has retraced above the 23.6 per cent retracement of the downtrend from the December 2022 high, which is an early sign of reversal.

It also retraced above 50 per cent of the prior downswing, a short-term positive. Historically, the April month is positive as the Nifty closed above its opening level more than 60 per cent of the time in the last 20 years. As stated in the last column, the direction for the next four to six weeks is positive. During this time, the index may test the 17800-18114 zone, which may lead to a formation of the right shoulder. Interestingly, the 61.8 per cent retracement level of the December-Mar downtrend is at 18101. Before these levels are achieved, the 17500- 590 zone will act as short-term support. During this process, the index will register a downward channel breakout, and eventually, it will fail.

The Nifty closed above the 100-week moving average. The history repeated again, as the Nifty moved exactly like June 2022. It took support at broadening formation. It fell below the 100-week average for just one week and was proven as a false breakdown. This time it took support at the channel line and closed above 100 MA. The Nifty also closed above the earlier broadening formation’s resistance line. It also closed above the 20DMA decisively. The 50DMA is just 1.13 per cent away, and it may test in the next two days. It is a known fact that the market moves in trends. Before forming another lower low, it must witness an upswing and test the resistance.

Importantly, the index has not moved below the September low in the correction. But the Nifty 500, Nifty Midcap-100 and Smallcap-100 have declined below the September lows. It shows that the broader market is weaker. The beaten-down sectors, like IT, Auto, Pharma, and FMCG, recovered last week. Out of all the sector indices, the Nifty PSE looks better on a long-term chart.

The main worry is now, and the India VIX is back to the 12.93 level. Last week, it fell over 15 per cent. Historically, the 11-13 zone is a very critical market. Any spike in volatility will hurt the bulls. On March 3, it declined to 12.18, which resulted in a sharp decline. During the current upside move, aggressive profit booking may lead to a sharp decline in a single day. It is better to be selective on trades and avoid highly leveraged positions.

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

Family Fund Manager)