Prolonged rally showing exhaustion

The domestic stock market ended its five-week winning streak. The benchmark Nifty ended 199.5 points or 1.12 percent and settled below 17600. BSE Sensex was also down 1.4 percent. The broader market indices – Nifty Midcap-100 and Smallcap-100 – outperformed by 1.5% and 2.9%, respectively. On a sector level, the Nifty IT index fell by 4.5% and the Pharma index by 1.7%. The Nifty PSU Bank Index gained 4.4%. After volatile swings, the India VIX volatility index closed at 18.22. FIIs slow buying during the week. Overall, Rs18,420.98 crores this month. The DIIs sold Rs 6,555.99 crores.

The Nifty opened with a big negative day last week and ended with an indoor bar. Between these two candles, the index consolidated in a range. Last week’s Shooting Star candle gets confirmation of its bearish implications by closing below last week’s low. With this close low, as mentioned in the last weekly report, with all probabilities 17992 is the intermediate high. The mid-week rally only continued over the weekend. It almost tested the 23.6% retracement level of the previous trend. Now, this 17329 level is a target for the bearish flag on an hourly time frame. The sudden drop of 1000 points in the Dow Jones rocked everything. But, it is not sudden. I have cautioned against the countertrend rally and its implications over the past four weeks. As expected, the fall is impulsive and violent. A too prolonged rally had shown the exhaustion of the last three weeks. As Nifty has obtained confirmations of all the implications of the bearish pattern, we now need to focus on the downside strategies. On Monday it may open at 17329, with all odds. There may be intraday setbacks. External factors such as inflationary pressures, rising interest rates and rising dollar index will dampen market sentiment. All of these have an inverse relationship with stocks.

Federal Reserve Chairman Powell’s press conference in Jackson Hole made it clear that this is the final end of quantitative easing and that we have already entered the quantitative tightening phase. This will have an impact on risky assets like stocks. The Dow and S&P 500 indices closed below the 38.2 retracement levels of the previous rally. Previously, they were just falling back to less than 50%. This current correction of two major global indices may extend below 3900 and may even test the previous low below. At the same time, our benchmark indices fell by 80%. This outperformance is due to the rally in growth stocks and perfect sector rotation.

Another crucial factor for emerging markets is the rising dollar index. It closed at 20, testing above $109.27. This is a great caution for all emerging markets. It hit our short-term target as expected, and the next target is $121 in the medium term. The USDINR target is intact at Rs.81 in the short term. It has already resumed its upward movement and closed almost the six-week high.

Now the question is whether the outperformance of Indian equities will continue. As I mentioned last, the new leg down is the final leg of the current bear market drop. This downside trip objective is near the 14000 area. Its bearish move will have at least three countertrend rallies or consolidations. Either way, if the Nifty closes below 17329 in the next two days, the drop will be steeper towards 16919 in no time. For all intents and purposes, the Nifty cannot cross 17727 just yet. For all bearish views, this will be the ultimate stop loss.

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

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