Volatile trading more likely

Losing Steam

• Nifty closed at a week’s low
• Weekly RSI declined to 65.81
• Bollinger bands are expanding
• Weekly MACD is also declining
• Nifty formed a higher low on a lower time frame
• It confirmed previous week’s bearish engulfing implications
• Index has formed 3 successive lower low candles and the first lower high candle

The equity frontline indices ended on a negative note on a truncated week. The Nifty traded in the 613.05 points range and closed with 219.2 points or a 1.02 per cent decline. BSE Sensex is down by 1.37 per cent. The broader market indices, Midcap-100 and Smallcap-100 indices, are also down by 1.27 per cent and 0.50 per cent, respectively. Nifty Media index is the top loser with 9.9 per cent, and Realty is down by 5.18 per cent: Nifty Pharma and Energy indices gained by 0.83 per cent and 0.62 per cent, respectively. FIIs sold Rs35,778.08 crore this month, more than they bought last month. The DIIs bought Rs19,976.66 crore.

The Nifty closed at a week’s low and confirmed the previous week’s bearish engulfing implications. For the second consecutive week, it closed negatively after the third week of October. As stated earlier, we are expecting a negative close in January. For a positive close, it must settle above the 21,732 points in the next three trading sessions. This means the index must gain 411.3 points, or 1.89 per cent, in the next three trading sessions to nullify the historical fact.

The index has formed three successive lower low candles and the first lower high candle, which is the first sign of weakness. The index also holds five distribution days. It is just 1.45 per cent above the 50DMA. A decline below 21,048 points and added distribution days will change the market status to a confirmed downtrend. The 20DMA is in the downtrend now, and the Bollinger bands are expanding, indicating the short bearish. All three trading sessions last week witnessed high-volume selling. The 10-week average acted as support last week. The weekly RSI declined to 65.81 and showed a loss of momentum. The Weekly MACD is also declining and about to give a bearish signal. In any case, the daily MACD line declines below the zero line, which will be negative for the market and confirm the bearish trend. The index has formed a higher low on a lower time frame, and the pattern looks like a double bottom. If the index closes are above 21,483 points on an hourly basis, expect a pullback towards 21,639 points, which is the 20DMA. Last Monday’s high of 21,750 points will be strong resistance for next week.

The Nifty IT and Metal indices are back in the leading quadrant in RRG charts, showing the built-up in momentum. The Realty index is losing momentum in the leading quadrant. A majority of sectors are in the lagging quadrant, showing the broader market weakness. The Nifty Auto, Pharma, and PSU Bank indices are in the weakening quadrant. Stay with the stronger stocks and sectors, which show strong relative strength and momentum.

Expect more volatile moves next week as the Vote-on-Account Budget is scheduled on Thursday, which is the weekly derivatives expiry day. On the downside, the 50DMA of 21,048 will act as crucial and strong support. Below this key support, the market will be in a confirmed downtrend. Stay cautious on both sides for next week.

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