Caution alert for investors

NSE Nifty closed negatively at the year's end. It gained 751 points in the year 2022. It ended the three weeks losing streak. It gained 298.5 points or 1.68 per cent during the last week. The BSE Sensex also gained by 1.7 per cent. The PSU Bank index and the Metal indices were the top gainers with 11.1 per cent and 7.9 per cent, respectively. The Nifty Pharma and FMCG indices declined by 1.5 per cent and 0.3 per cent, respectively. FIIs sold Rs14,231.09 crore, and the DIIs bought Rs24,159.13 crore worth of equities. FIIs sold massively by Rs2,78,429.52 crore worth of equities during the last year.

The benchmark index, Nifty 50, gained for the seventh straight year. Historically, the Nifty had two streaks of high yearly closes - 2002 - 2007 (6 yrs) and 2016 - 2022 (7 yrs) and in between had a 6-year streak (2008 - 2013) of consolidation. The big question now is... Will the current 7-year streak continue? Or will we enter into a long period of consolidation? Will the negative divergence work this time, also? Only time can reveal.

The Nifty formed a bearish engulfing candle on a monthly chart. Historically, before all the major corrections, the index formed this most successful bearish candle. 2000, 2006, 2008, 2011, 2016, 2018, 2020 and the late 2021 tops were formed with bearish engulfing candles. Interestingly, the RSI has formed a very serious negative divergence currently. Before the March 2020 sharp decline and the 2016 correction, a similar divergence occurred. On a weekly time frame, on several occasions, negative divergences occurred. So this time, we need to get confirmation by weekly RSI moving below the 52-50 zone. Last month, the RSI shifted its range into a strong bullish, above 60, after spending ten months in the neutral zone. This, along with the price breakout, did not sustain more than six weeks. With we can assume that the breakout is a failure. For a bullish bias to continue, the index has to break above the previous high, and RSI must be in a bullish zone. Last week's recovery is in expected lines and faced resistance at 50DMA and the 38.2 retracement level of the prior three-week fall.

The much broader market index Nifty-500 formed a new all-time high but failed to move further high. It declined by over 6.5 per cent from the recent top. The Nifty Midcap-100 has not formed a higher high, showing under performance. It declined by over 9 per cent from the recent top and shows that major correction if any, will first hit the Mid-cap stocks.

On a daily chart, the Nifty formed a dark cloud cover on Friday and closed below the 50DMA and the short-term 5 and 8EMAs. It also failed to close above the prior day's high. The index has already formed lower tops and bottoms. The 100DMA (currently at 17878), which acted as support in the recent lows, will be crucial support for now. Last week's positive bias is just a technical pullback, as we mentioned earlier. To continue the positive bias, the Nifty must close above the 50DMA or the prior day of the 18261-65 zone. In any case, if it sustains below 18080-70, the downtrend will resume and will form another lower bottom below 17774. In other words, the 17774-18070 zone will be crucial for the market not to enter into a strong bearish mode in a confirmed downtrend.

The FIIs exited the equities by the highest ever yearly selling. They sold Rs2,78,429.52 crore worth of equities during the last calendar year. After the holiday season, we need to watch the FII action in the new year. The earning season will start in the next ten days, and watch out for outperforming stocks. For now, it is advised not to have higher leveraged positions and stay cautious.

(The author is Chief Mentor,

Indus School of Technical

Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)