The market could experience a sharp contraction

National benchmarks ended lower for the sixth consecutive session. With broader selling pressure in the market, NSE Nifty is down 629 points or 3.83% over the past week. BSE Sensex is down 3.7%. The Nifty Midcap-100 and Smallcap-100 fell 5.2% and 7.9%. The Metal index was the worst performing with 12.4%. The Energy and PSU Bank indices were down 10.6% and 8.8%. All other sector indices closed in negative territory. Market breadth has been negative all week. FII sold Rs 32,701.03 crore and DII bought Rs 26,735.36 crore. The India VIX volatility index rose 10.52% and closed at 23.49.

The domestic stock market is under heavy selling pressure in the broader market. The Nifty closed at the post-July 30, 2021 low. The drop is severe and steeper than previous swings. The first drop in the current downtrend is 42 sessions and a drop of 11.9%. The second swing took 33 sessions for 14.5%. But the current drop is 13.9%, the fall only took 15 trading sessions. Interestingly, the ups are short-lived and consume almost half the time of the down. As Thursday’s low hits the previous major swing, there is a chance that the 15671 level will act as support. Support for the widening triangle is near 15150. And current swing Fibonacci extension support is placed at 15290, a 161.8% extension level.

Typically, sharp, steep trend moves will experience counter-trend consolidations for a week and then resume the downtrend. The fact is that the Nifty is far from the short-term average. The price has to pull out the 20DMA sooner or later. At the same time, the Nifty is below the lower Bollinger Band, and the upper and lower Bollinger Bands are strongly in a downtrend. The index has not yet reached the low, but the lower band has already fallen below the previous low. This trend leads to a day or two of indecision or smaller pullbacks.

Interestingly, the long-term trend indicator, 200 DMA, enters a bearish trend for the first after October 2020. After the death cross on April 18, the gap between 50 and 200DMA increases. At the same time, the distance between the index and the moving averages is also increasing. This can lead to a pullback towards one of the short-term moving averages. The index has not moved more than 8 out of 8 days in one direction. Currently, the Nifty is declining for the last six successive sessions. The negative bias extends to a maximum of two additional days. During these two days, we have to watch the index for its support or a new bottom. If the Nifty does not fall below 15671, the pullback may be short-lived. Immediate resistance is at 16301, and above it the gap area will act as strong resistance. In any case, over the next two days the Nifty declines below 15671, and immediate support is at 15464. So look for the behavior of the index at the 15464, 15290 and 15150 levels. We cannot predict more than these levels at present.

The Nifty has lost 1320 points in just nine trading sessions. The derivatives data shows that there are huge shorts that have accumulated in the system. The PCR is almost in the neutral zone. On the decline, Open Interest (OI) is increasing almost daily. Ahead of the next weekly expiry, the market might witness strong short pressure. This can increase market volatility. At the same time, implied volatility is very high, above 20, which means option premiums have become expensive. Derivatives traders should adopt prudent risk management methods.

As we expect a bottom next week, if the Nifty is protecting the likely bottom for at least three days in a row, and a follow-up day of a sharp rise with huge volume will be classed as a rally attempt. After a basic formation and a breakout, the market will offer us medium-term opportunities. Look for consolidation in the market and understand that the technical pullback is only due to short coverage. It was reiterated to continue to take a very equity-specific approach and adopt a positive but cautious outlook on the short-term markets.

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

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