It’s better to take less leverage

The domestic equity markets succumbed with losses for the second week. The benchmark index, Nifty, declined by 312.85 points or 1.80 per cent. BSE Sensex is down by 1.94 per cent. The broader indices, Midcap-100 and Smallcap-100, were down by 2.06 per cent and 2.49 per cent, respectively. On the sectoral front, only the Realty index was positive by 0.21 per cent. The PSU Bank and the Auto indices were the top losers, with 4.54 per cent and 3.89 per cent. All the other indices also declined by 1-3 per cent. The market breadth was extremely negative. During the last, FIIs sold Rs7,953.66 crore, and the DIIs bought Rs9,233.05 crore worth of equities. With increased volatility, Nifty registered a fall for a second consecutive week. During the last week, it traded in 680 points range and ended with a 1.80 per cent decline. It broke all the meaningful supports and traded below all long-term moving averages, including the 50 weekly average. The index failed to close above the previous week’s high since December high. The declines were more impulsive during the last 15-week downtrend, and the counter-trends were smaller. It is moving in a perfect downward-slopping channel. Technically, the price structure is damaged, as the index tested the 100-week moving average (17051) too. The 50-week average (17339) and the sloping trendline, drawn from December 2022 high, have become resistances for now. For a positive bias on the upside direction, the index has to close above 17,339 and the prior week’s high of 17,530 points. This looks like a Herculean task for now. In the earlier cases, the index failed to close above the decline week's high. Any counter-trend consolidation could be in the form of an inside bar next week, which is on the most optimistic note. The pattern analysis shows the rising wedge breakdown target was met by 50 per last week. This target was achieved on the 13th week (the Fibonacci number) of the 26 weeks wedge. The price and time target match exactly. We expect in another 8-10 weeks’ time, the pattern target (around 15,700 points) to be achieved. The Nifty corrected 10.79 per cent from the high of 18,887.60 points. The prior major swing low is at 16,747 points. This could be the last meaningful, visible support. In any case, a bounce from this level could be 17817 (50% retracement) or 18070 (61.8%) retracement level. If this is a possibility, the next pattern looks very scary. Then, we can consider the 16,747 zone will be a neckline, and the 18,070 zone will be a right shoulder. The left shoulder is already in place. This forecast could be the scariest.

The historical fact is that whenever the Nifty is up by 100 per cent from the bottom, it corrected more than 25 per cent from the top. In 2002 it was 25 per cent. In 2004 it was 33 per cent; in 2006, it was 30 per cent; in 2010, it was 28 per cent; in 2016, it was 25 per cent. In 2008 it was corrected by 64 per cent, and in 2020 it was 39 per cent. But, the rise from the March 2020 low is 148 per cent, which never happened. The Sept-Dec 2022 rally was unexpected. The prior major correction from the 148 per cent rise (18604) is just 18 per cent. As the historical fact is that the major corrections from the top are at an average of 25 per cent. Suppose this is a probability due to many global negative developments such as SVB and other banks collapse and the probable global recession. In that case, we expect the Head and Shoulders to be a reality. In any case, Head and Shoulder breakdown happens, and in the next 8-13 weeks, the pattern target is at 14,600 level. The 25 per cent correction target is at around 14,166 points. All the major corrections were ended in 8 or 13 months (Fibonacci Numbers). The current correction is just four months old. So expect a correction for another 4 -9 months. This forecast looks scary, but we need to respect the history and the technical analysis based on the ‘History Repeats’ thesis.

The weekly RSI (40.77) is about to shift its range into the bearish zone. The MACD has already declined below the zero line and is bearish. The Nifty trades below Daryl Guppy's multiple moving averages, long and short. The only positive on a daily chart is that the Nifty closed above the prior day's high after taking support at the slopping channel. It formed two doji candles in a row at the bottom. The first Doji candle gets its confirmation for bullish implications. But the second has created confusion about continuing a positive bias. The daily RSI has developed a positive divergence. The market is in a very critical situation. If Thursday’s low 16,850 is protected, the Nifty can initially test the 17212 and 17325 zone. The 200 DMA, 17451, will be a key resistance. On the downside, below 16850, the 16747-677 is crucial lifeline support. It is better to trade with a small position size and less leverage.

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