Wait for volatility to settle, be selective on trades

The fear of another financial crisis because American banks collapsed, and a series of negative news flows triggered the sell-off in Global markets. The Dow and S&P 500 indices broke the crucial supports. Last week, the DJIA declined by 4.44 per cent, and S&P500 was down by 4.55 per cent. The domestic market also declined sharply in the last two days. The Nifty fell by 181.45 points or 1.03 per cent. The BSE Sensex is down by 1.13 per cent. The Midcap-100 closed positively by 0.06 per cent, and Smallcap-100 declined by 0.11 per cent. On the sectoral front, barring Nifty Energy, up by 1.92 per cent, all other sector indices closed negatively. The Realty index was down by 3.36 per cent, and the PSU Bank index declined by 2.85 per cent. The Advance-Decline ratio is negative. FIIs bought Rs.14,361.85 crore, and DIIs bought Rs.6,929.35 crore this month.

The Nifty closed below the 200DMA for the third time in the last eight trading sessions. Currently, the Nifty is trading below all the key short and long-term moving averages. The index is formed at lower highs and lower lows, moving in a downward channel. It declined 8.64 per cent (in 14 weeks) from its 1st December top of 18887.60. The previous correction From October 2021 to June 2022 was 18.39 per cent, which ended in 13 weeks (13 is Fibonacci Number). On a weekly chart, there is a clear difference between these two corrections. In the earlier correction, the swings were two to five weeks old. But the current correction is a bit different. A week of big decline and consolidation for two to four weeks. On a daily chart, the swings are visible, and recently it recorded one of the longest losing streaks.

The Pattern analysis shows that the Nifty failed to make a higher high after the breakdown of a rising wedge on a weekly timeframe. It declined below the 38.2 per cent retracement level of the June-December 2022 rally. It struck between a 10 and 50-week averages for the last 12 weeks. With a high probability, it may breach the 50-week average (17350) next week. Importantly, the sloping trendline support drawn from October 2021 high, which acted as resistance earlier, is placed at a similar level of 17250, which is also the previous week's low. A weekly close below the 17250-350 zone will be a disaster for the market.

The weekly Relative Strength Index (RSI) is at its lowest after July 2022. The monthly RSI got the confirmation closing below the prior low for its negative divergence. The MACD line is also declining and below the prior low in the monthly chart. The weekly MACD is nearing the zero line. The RS and Momentum are below the 100 zone, indicating that the Nifty entered the weakening quadrant in the RRG charts.

In these conditions, the Nifty has to close positive for the next week to contain the more bearish power. The Must close above the 17900 to break the downward channel. Last week's high of 17800, and the 50DMA of 17825 are the crucial resistance. Before this resistance cluster, the 20DMA and the gap area resistance of 17573 will act as immediate resistance. In any case, the Nifty closes below 200DMA for the second day on Monday will confirm the strong downtrend to continue. The immediate targets are open 17255 and 16980.

Last week India VIX surged by over 10 per cent and showed its impact on the market. Another important fact is that no sector is in a position to lead the market. All the sectors are losing their momentum. The Auto and the FMCG sectors look better because of M&M and ITC's outperformance. PSU Bank index lost its relative strength and momentum.

Next week, the global financial news flow and the market's reaction will play a major role in our markets. As the gap down opening is possible, it is better to wait to settle volatility. First-hour range will be crucial for the directional trade. Be very selective on trades.

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