Time to cut down positions, avoid aggressive long or short bets

The equity markets were resilient to fall or hesitant to rise during the last week. The benchmark indices ended on a flat note. The NSE Nifty lost just 32.4 points or 0.2 per cent during the last week. The BSE Sensex also lost 0.2 per cent. The broader market indices outperformed the benchmark indices. The Midcap-100 and Smallcap-100 indices up by 1.3 per cent and 1.2 per cent respectively. These two indices scaled to a fresh lifetime high. On the sectoral front, the Nifty Realty registered a fresh breakout with a 6.3 per cent gain and closed at near to 2018 high. The Metal up by 2.8 per cent, and the Media index advanced by 1.1 per cent. The Auto, PSU Bank indices closed 2.5 per cent and 2.1 per cent lower. The institutional participation is at low as the FIIs sold Rs. 4256.45 crore, and DIIs bought Rs1903.45 crore during the current month (7 trading sessions). The Advance decline ratio is mostly negative.

The NSE Nifty continued its ambivalent moves and not given its intentions about the trend. For the last 14 trading sessions, it is trading between 15,670-15,900 zone. It failed to make a decisive move beyond these levels. It formed a perfect Doji candle on a daily chart. On a weekly chart, it formed a long upper shadow candle. The 20DMA began to trend down on contracting Bollinger bands. This is the first sign of a probable downside move. Even on the last Friday, it formed a similar candle with a small body. It broke the trendline support drawn from April 22, closed below it for the second day, which is a weaker sign. Even though it broke the trendline support, the benchmark index has not made a lower low for now and not even retraced 23.6 per cent of the prior uptrend. This shows that the market is not in a trending phase, is in consolidation. The consolidation is in a tight zone and with many indecisive candles. It traded in the same price zone for the last two weeks and formed a parallel bar. As the consolidation is not given any specific clues, we try to analyse the index with some price internals. The short-term and magnet of the marker or even a mean average, the 20DMA started trending down with volatility contractions. Longer the contraction period, the sharper the expansion. For the last 10 days, the Bollinger bands narrowed (contracted) expect a bigger and sharper move. Already an uptick in India VIX during the last week has resulted in high volatile moves. The VIX rose by 7.05 per cent to 12.94.

The negative divergences in the RSI on daily and weekly charts still present. The daily RSI failed to move above the prior major swing high and fell below the prior swing low. This lower top and lower bottom trend divergent from the price, making parallel tops and bottoms. The histogram shows an increase in bearish momentum in the last two days. The -DMI is above the +DMI is a negative sign. The 50DMA (15415) support is just 1.78 per cent away, which is placed at 18th June swing low. The divergences will confirm, once the price declines below the 50DMA. The market breadth is weak as the number of advancing stocks are declining. The increase in distribution days, along with the breach of 50DMA, will result in a clear trend reversal. As long as this does not happen, the market consolidates for some more time. The decline below 15500-415 support will signal the trend reversal, where it can test at least a 38.2 retracement level of 15241. We can't project more than this level for now.

But, a bounce and close above the Friday high 15,730 points, may lead to a retesting or an upside breakout, which is impulsive in nature. Technically, the market is at a crucial juncture, and next week's move is very vital to forecast the direction. It is time to be cautious and cut down the position size. Avoid aggressive long or short positions. An uptick in implied volatility is also indicating the probable surge in daily price ranges. To take directional bias on the market, it should come out of the present tight consolidation zone.

(The author is financial journalist, technical analyst, family fund manager)