Nifty turns bearish amid volatility

The domestic markets faced another week of volatile movements within the small range. After three days of negative closing, NSE Nifty closed with a 69.40 points or 0.40 per cent loss. The BSE Sensex declined by 0.2 per cent. The broader indices, Nifty Midcap100 and Smallcap 100 were down by 1.4 per cent and 2.7 per cent, respectively. Nifty Media index was down by 6.2 per cent, and the IT index closed 2.5 per cent lower. The FMCG and Auto indices registered a positive closing of 1.1 per cent and 0.5 per cent. FIIs sold Rs 40,652.71 crores, and the DIIs bought 29,869.52 crores. This is the fourth consecutive month that the FIIs sold more than Rs 40,0000 crores worth of equities. The market breadth is mostly negative and the VIX is at 19.42, up by 5.79 per cent.

After a volatile week, the Nifty formed an inside bar last week, as it traded within the previous week's range. It traded in 489 points range, formed a long upper shadow candle, and resembles a shooting star. Even after two successive efforts to close above the 20-week average, it failed. At the same time, it formed a big bearish engulfing candle on a daily chart or an outside candle, as it experienced a flash crash in the last 90 minutes of trading at the weekend. With this 300 points decline, the Nifty closed below the 50 and 200DMAs. For the previous ten trading sessions, the index is just oscillating around these two key moving averages. Fifty per cent of the Nifty stocks are trading below the 200DMA, and 38 per cent of the stocks are below the 50DMA. This shows the weaker strength in the market trend. The only positive factor is that it closed above the weekly opening. These outcomes are not good for the market direction.

The last eight days' price action is nothing, but a counter-trend consolidation, the pennant. Interestingly, after taking support at 50 per cent of the previous upswing, the current consolidation failed to cross the 50 per cent of the downswing. In any case, a close below the 17000 level will lead to the resumption of the downswing again. The target of this breakdown is at a minimum of 16124, and sooner or later, it can test the 15327-15100 zone of support, which is nothing but the broadening triangle's support line. Even the previous two swing's Fibonacci extension target is almost at the same levels. The Nifty failed to fill the gap of 18th April, which has resulted in the 'Death Cross' the 50 DMA decline below the 200DMA is a long-term bearish sign. A failure to 'close above' the gap-down actions was a sign that the Bears are in full control and that until the Bulls can make Sensex close above its last gap-down area, they would maintain their control. The benchmark index failed to form another minor high. It formed three higher lows and two lower minor highs, which is a minor downtrend, an intermediate downtrend, in a long-term downward channel. The classical technical analysis describes this setup as nothing but a confirmed long-term downtrend. The long-term downward channel already has two highs and two lower lows.

Currently, the Nifty has seven distribution day counts along with its decline below the 50DMA, which is also a downtrend character. In fact, the benchmark index is at a very crucial juncture, as it failed to sustain above the 200 DMA and added distribution days. As it is still in the Pennant formation, there is decisive directional trade and the Nifty in a "No Trade" zone. As mentioned above, the 17000-17457 zone needs to break for a directional trade.

For the last weeks, the weekly MACD line has been struggling to move above the signal line. With Friday's sharp decline, the histogram shows that the bearish momentum has increased. The daily and weekly RSI is below the 50 zone and not showing any kind of divergences as of now.

The Nifty also closed below the Anchored VWAP, anchored at the previous swing low. There is very little chance of continuation of the current consolidation.

The analysis of Relative Rotation Graphs (RRG) shows that a majority of sectoral indices are losing their relative performance. The leading sector indices like Nifty Bank, Services Sector Index, IT, Auto, Realty, Media and the Financial Services are inside the weakening quadrant. The FMCG sector is gaining momentum in the improving quadrant. This shows that currently, the market is missing the leading sector.

As mentioned last column, the Dollar index (DXY) moved above the 103 zone, which is above the prior two major swing highs. After June 2017, it reached above 103 levels. This is a big negative for the equity markets. The US market closed negatively for the fifth consecutive week and at the prior swing low. If the Dow Jones index closes below the 32578 (currently at 32977) will result in a big breakdown. For the last 15 weeks, it is trading below the 40 weekly average and formed lower highs and lows. During the mid-next week, the Federal Reserve is meeting to end the easing policies and raise the interest rate. A 50 or more basis point will certainly dampen the market sentiment.

It is better to stick to directional bias with the outnumbered bearish signs. Go with the trend, and avoid the long positions as long as the benchmark trades below the 17457. Focus on the companies which are declaring good growth in earnings.

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