One thing you should not be is to remain in denial in the market. The weekly chart is not an encouraging one at all. All of us breathed a bit lighter over the last two weeks when the Nifty made a small rally. Last week’s column pointed out the importance of sustaining a Nifty breakout above 17,500 and for a very brief while, the market seemed in a mood to do that. But call it unwillingness of the bulls or call it the resilience of the bears, that mild attempt higher was quickly snuffed out and prices slid once again, coming down to test the supports near the 17,000 levels yet again. Curiously, the market seems to have repeated this pattern in quick succession as can be seen in this chart.
The immediate question that jumps to mind is whether we may have a repeat of the long-range red candle for the next week? That is difficult to say but what can be said are two very obvious facts on the chart.
First, the long-term trendline stands decisively broken so bears are on the ascent.
Second, the second pattern is actually a base-forming under the first base. That too is a bearish signal.
The intra-day charts through the week never held out any hope of a revival and if one had tried long index positions then it would certainly have been a very optimistic person.
The fact that the Nifty hit the first indicated target at 17,693 and then fell off from there almost from the beginning of the week would have been sufficient to keep away from long index positions. The lower end was projected for near 17,200 and then 17,028 and the first level pretty much held through the week, until Friday when it cracked and prices dropped to test the main support zone at 17,000. The spot Nifty dipped below the 17,000 mark towards the end of Friday. The next chart shows the move through the week.
The Bank Nifty was expected to fare worse and it did, suffering a sharper decline. The Nifty Financial Services Index built bearish Open Interest through the week, probably in response to the Reserve Bank of India announcement regarding NBFC stocks.
Sentiment continued to remain depressed as foreign institutional investors persisted in the sell mode, and cranked it up a bit too. It appears that they are on a sell India (trading near highs) spree, buying China (down sharp) as they find valuations in China far more attractive. But mid-December is when they all go away on vacation so, perhaps, the selling may ease? That may be the first thing to check in the coming week or so.
The U.S. Federal Reserve is done with its event and announcements have been along expected lines. Markets seem to have reacted a bit more to the Bank of England raising rates. These may quieten down next week. State Bank of India raising rates a tad may also spook local traders. But the VIX is not overly perturbed despite the sharp fall of the last two weeks. The India VIX was near 24 two weeks ago has fallen to a low at 13.75 so no one is really belting for the hills yet.
Among sectors, we had a washout week with only IT managing to post some gains. Usually, that may herald an oversold bounce. The midcap and small-cap indices fared better compared to the frontline ones.
In fact, the smallcap index hasn’t even hit the support averages band, while the Nifty and Bank Nifty have broken such a band already.
This is also supportive of the conclusion that the retail trader too is not panicking much. The Midcap Index is similarly poised and hence some more dips in the market, were they to occur, could bring it towards supports and engineer a bounce. If it happens, then this will be the clichéd Santa rally. If it doesn’t come, will we then call it a Banta decline?
Sentiments are shaken but perhaps, not stirred yet, to paraphrase James Bond. Since more declines are foremost in people’s minds, let’s address that possibility first.
The last swing Nifty low is 16,850, which is also the 38% retracement zone. The next one of 50% retracement will be at 16,350. The 200 simple moving average is 16,265. While some of the short put holders at 17,000 Put blinked, it continues to be the largest Put OI base yet. The next is built at 16,500. Gann analysis based on movements of the corrective is now suggesting a fall to the 50% level.
Can there be positives? Of course, there will be, but they will all be subject to the market not going down further. For one, the RSI on the daily chart is showing the first signs of a possible range shift at the current low. Now, this can work only if prices revive next week. Second, prices have dropped to near prior support so here too the prices have to revive quickly. Third, if FPI sell figures ease, then there shall be an immediate sentiment boost and that could create some bounces.
So there it is. For lower targets, markets have to just drift lower and they may pick up further downside momentum. But for a rise, they need more support by way of price action, news flow, and perhaps some positive events. Evidently, the odds are stacked against that. But you never know, trends look up when you least expect it. If you hear dire lower targets, then the chances of revival can be bright.
CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise, and NeoTrader; and chief investment officer of Plus Delta Portfolios.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
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