Bulls losing hold on the trend

The equities witnessed profit booking at the new lifetime. NSE Nifty declined by 199.50 points or 1.07 per cent last week. BSE Sensex also declined by 1.1 per cent. But, the broader market indices, Nifty Midcap-100 and Smallcap-100, underperformed by declining 0.6 per cent and 1.1 per cent. The PSU Bank index continues to outperform the market as it gained by 4.8 per cent. The FMCG is up by 2.2 per cent. The Nifty IT was the worst performer, with a 6.1 per cent decline. The Realty index is also down by 3.4 per cent. The Advance-Decline ratio was down to 0.46 in the broader market index, the Nifty 500. The India VIX is almost at 13.48, up by just 0.20 per cent. FIIs turned sellers in the last, and they sold Rs.5,657.14 crore during the last eight trading sessions in this month. The DIIs boughtRs.7,089.40 crore.

As expected last week, the market corrected by 2.53 per cent from the lifetime high of 18,887 points. The 1st December's Evening Star candle reached almost it target. It exactly tested the 20DMA and finally closed precisely on it at the end of the week. It formed a bearish engulfing pattern on Friday. As it formed after a decent correction, we can expect some more correction because we can consider it not only a topping formation but also a continuation pattern. The index closed below the rising trend line support on Wednesday and also below the previous lifetime high of 18604. At the same time, it almost tested the 23.6 per cent retracement level of the prior upswing from the September low.

On a weekly chart, it formed an inside bar as traded in the previous week's range. The pattern also looks like a dark cloud cover and the bearish belt hold. The 23.6 per cent of 18382 and the previous week's low of 18365 will act as crucial support for the next week. A decline below this level will take us towards the 18070 -114 zone of strong support, which is the 38.2 per cent retracement level and the previous tight base breakout level. This is also near the 10-week average of 18034. We can't forecast below this level for now. On the upside, the Nifty has to sustain above the 18605-665, an uptrend to continue. A close above the previous day's high means the index is negating the Bearish Engulfing's implications. Above this level, the index will test the 19421-653 zone.

On the front of the indicator, the daily RSI declined below the prior swing low, which is not a good sign. It also declined below the channel support line and faced resistance at 61.60. The negative divergence is developing now in the weekly chart. The daily channel support level is placed at 40 zone. Historically, the RSI has taken support at the 40 zone several times. Only in case of a decline below 40, the trend will become bearish. Even the MACD histogram shows an increased bearish momentum. The negative directional line, - DMI, is above the +DMI, and the trend strength indicator ADX is declining. These signs are nothing, but the bulls are losing their grip on the trend. However, the short-term trend needs to extend further towards 18030 to turn the intermediate trend down.

Even the global markets also retraced to 23.6 per cent level. The Dow and S&P 500 declined below the 20DMA. These two major indices formed parallel lows. A decline below the previous low will be negative for the markets.

The option chain shows that the 18600 strike has the highest open interest on both sides. It may be a Herculean task to surpass the above-said level of 18605-665. The derivatives data also indicate that the long unwinding at a brisk pace and fresh shorts were built up. The volume declined to below average. The Put-Call Ratio declined to 1.25, which is almost neutral. In short, the market is at an influx point. If the Nifty fails to close above 18665 on the next weekly close, we may see sub 18000 levels. For now, it is better to have a neutral stance and cut down the highly leveraged positions.

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