Trend continues to stay intact

The equity benchmark indices traded with high volatility and registered a new high close weekly. NSE Nifty gained 186.80 points or 0.84 per cent, after trading in the 315-point range. BSE Sensex also gained by 0.80 per cent. The Midcap-100 and Smallcap-100 indices outperformed by four per cent and seven per cent, respectively. The mid-cap index hit a new high. The Nifty Metal and Realty indices were the top gainers with 5.3 per cent and 4.3 per cent. Bank Nifty also registered a new high close on a weekly basis with a 2.9 per cent gain. All other sectoral indices closed higher. During the first week of the new financial year, the FIIS sold Rs3,835.75 crore worth of equities. The DIIs bought insignificantly Rs2 lakh worth of shares.

The Nifty’s performance last week was marked by the formation of a five-week base or 18-day cup pattern. This pattern, along with the higher volumes recorded, validates the breakout. The index also formed a small body candle that resembles an evening star. On Thursday, it registered a highly volatile session and hit a new lifetime high. However, the very next day, it traded within a narrow 101-point range, with the lowest volume in the last month. The index closed negatively for three days in a four-day week, indicating some market indecisiveness. The index is making new highs, but concerns remain, as there are minor incremental highs and major declining moves. Since January 16, the index is advancing with low volume and declining with higher volume, A character that typically indicates a topping formation.

The most important concern is the VIX. It declined by 11.65 per cent last to 11.34, the lowest since November 24. Normally, the low VIX is not for an uptrending market. But recently, it lost relevance after its lowest level last November; the index moved impulsively upside, which is not a character.

The Nifty is now 1.54 per cent above the 10-week average, which acted as a support. Out of 11 weeks, it took support for eight weeks in the recent past. Last December, the distance between the index and this key moving was 7.65. The narrower the distance means reversion. When the mean reversion is in place, a decisive close below this average will result in a sharper downside.

The bearish divergence still exists in the Weekly RSI and MACD.

Interestingly, the MACD line has been below the signal for the last three weeks. This setup is another worry for now. The Relative Strength of the index is still declining, and there is an improvement at an all-time high. The lagging momentum and low relative strengths are also concerns. The global markets were weak last week, as the Dow Jones closed below the key rising trendline support, and the S&P closed below the previous week’s low. The Rupee was above the Rs83 level after testing a lifetime low of Rs.83.70. The FIIs continued to sell domestic equities. They sold over Rs4.3 lakhs since January 2021.

For the next week, the Nifty may face resistance at the 22,600-22,800 zone. The derivatives data also shows that the highest Open Interest is built up in these strikes. A decisive large bar with a higher volume above the zone will result in a sustainable rally towards 23,150. In any case, if it declines below last Thursday’s low or week’s low of 22,303 points, it will be negative, and the 20DMA of 22,222 is the crucial support.

In a nutshell, while the trend continues to stay intact, there are possibility of markets staying under range-bound consolidation. Keep an eye on 20DMA, if there is any selling pressure. The Banks and financials may outperform with high volatility. Low VIX levels remain a concern and may infuse spikes in volatility. Be with a cautiously optimistic approach.

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