Nifty consolidating in a minor trend

Equity markets were confused about the direction before the Budget as the event risks weighed in. NSE Nifty gained 71.05 points or 0.40 per cent last week. BSE Sensex gained by 0.6 per cent. The broader market index, Nifty Midcap-100, was down by 1.1 per cent, and the Smallcap-100 index closed flat. The Nifty IT was the top gainer with two per cent. Nifty Bank, FinNifty and Energy indices closed with 0.3 - 1 per cent gains. FII sold Rs19,880.11 crore, and the DIIs bought Rs16,182.38 crore worth of equities. The India VIX is down by 4.65 per cent to 13.75, which is the lowest in the recent past.

The market has been clueless about its direction for the last four weeks or 20 sessions. The prolonged sideways action will generally result in an impulse move in the direction of the breakout. It is waiting for a trigger point, which is Union Budget. Historically, in 14 out of 22 years, the pre-existing trend has reversed post-budget. At the same time, pre-budget months have a positive to a neutral bias, whereas post-budget months have a negative bias. On only seven occasions in the last 26 budget sessions (Including Vote on Account budgets), the index moved over 1% to 4%). Even in the 2020 historical fall, the budget acted as a trigger point to it. Let us wait for the triggers this time, and we will go according to direction.

The Nifty mostly hovers between 50 and 100DMAs. It has formed the second consecutive long-legged Doji candle on a weekly chart. Two Doji candles in a row is a sign of extreme indecision. Out of this zone, closing, i.e., 17761-18183, is required to get the first sign of a breakout. The last four weeks' price action is limited to the December third week's range. The 50 per cent retracement level (17818) of the previous upswing and the 20-week average acted as a strong support zone. This 17761-18265 range has to break decisively on either side for a directional bias. Currently, NSE Nifty is exactly at the halfway mark. It can go either side. The inside bars and the Doji candle doesn't indicate any trend change implications. Before this four-week consolidation, the Nifty broke the rising wedge pattern, which is negative for the long term. At the same time, the breakout, which led to forming a lifetime high, did not sustain for the second week. With this, the breakout on the upside failed, and the downside breakout is valid.

Technically, the Nifty is consolidating in a minor trend, and it has been in the intermediate downtrend. In any case, if the Nifty breaks below 17760 on a weekly closing basis, the long-term trend also will on the downside. The 50DMA is already in the downtrend, and the 20DMA is flattened. The 100DMA almost flattened. It acted as a strong support in recent history. Interestingly, the long-term trend indicator, 200DMA, just curved on the downside. Even though the Nifty is trading above the 200DMA, turning downside is not a good sign. The weekly and daily RSI in the neutral zone, at historical support. The weekly MACD histogram shows an increased momentum on the downside. As mentioned in the earlier note, the Nifty formed a double-bottom kind of pattern. With the extended right bottom, the pattern changes into a rectangle or a flat base. This is also called an Adam and Eve double bottom. The breakout of this base may not happen in the next six trading sessions (before the budget). A strong closed with a high volume above 18265-283 will lead to a strong upside move towards another new high. If it fails to move on the upside and breaks below the 17760, the immediate downside target is 200DMA, currently at 17286. The 27 week, rising wedge breakdown target is placed at 16000 level, which is also an 80 per cent retracement of the wedge. Generally, the pattern breakout targets will meet less than the pattern formation duration. We have already spent four weeks sideways. Post-Budget, if the direction is on the downside, the target will reach faster.

As the event risk is very near, trading in the zone will be difficult, particularly in a directionless market. The volatility will increase naturally on event day and expect erratic movements in shorter periods. The RRG charts exhibit the leading sectors are missing. Though, Metal, PSU Bank, and Oil and Gas sector indices are in the leading quadrant, losing their momentum. The IT index, which was the top gainer last week, is near the leading quadrant. All other sectors are in the lagging quadrant. This shows market needs a big push to gain momentum and relative strength. I hope the Budget will give a booster dose to the market.

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