Divergence of indicators points to weakness in markets

Finally, the profit booking in the market during the week pushed down the key indices. With one positive session and four negative days, NSE Nifty ended winning streak of six weeks. The Nifty ended with 120.75 points or 1.1 per cent loss last week. BSE Sensex also fell by 1.4 per cent. Nifty Midcap-100 lost just 0.4 per cent and Smallcap-100 advanced by 0.4 per cent. The Nifty Pharma index gained most by nine per cent, and the IT index rose by 4.5 per cent. The institutional participation was very low during July month. FIIs sold Rs 751.34 crore and DIIs bought just Rs55.49 crore only. Overall market breadth was in favour of declines during the week.

Technically, the NSE Nifty is mostly consolidating within the previous week's range, and it closed lower end of the range. Even though it broke the rising wedge support, the key support of two-week low of 11,058 has not broken on a closing basis. Among all the swing highs, from March lows, the current swing high is in the form of a box. And the Nifty is spending a lot of time to form a new swing. The 20-EMA is acting support for the past few weeks. During the last week for four days, the Nifty opened at high or a gap up and closed at the lower level. For the last two days, it is closing below the previous bar low. This price structure is nothing, but a distribution. As volumes are declining, the addition of distribution days is limited one day. The distribution is mainly in large-caps.

Let us examine the probable near-term supports. The consolidation range low of 11,058 is key support on closing basis. On Friday, it broke on an intraday basis. The gap of July 21 is filled on Friday, and the July 17 gap is to be filled. The 20-EMA and this gap area are at the same zone of 10,933. The 200-DMA is placed at 10,860. It means, 11058- 10860 is the support zone for the Nifty for the next week. Below this, zone 10,550 is a major support for the Nifty and the market as well. Only below 10550, the current uptrend will reverse to the downside. Unless a lower low below 10,550 is not formed, the uptrend is intact. On the upside, firstly, it should close above the previous bar high. Later, it has to move above 11,377 in a faster retracement. Then only the uptrend will sustain.

The negative divergences in the majority of the indicators are giving confirmations for the bearish outlook. The RSI has not made any higher high but, broken the support line. Watch the RSI (60.72) at 55 zone carefully. A close below 55 will be confirmation to the continuation of down move towards 10550. The +DMI is turning down and at a prior swing low. This shows that the positive strength in the trend is weak.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)