Be cautious and avoid bull traps

The markets were not impressed with the 'Atmanirbhar Bharath' or Rs20-lakh crore package. Barring Wednesday, the weakness continued throughout the week.

The NSE Nifty lost 114.65 points or 1.24 per cent during the last week. Another benchmark index BSE Sensex lost 1.7 per cent.

Broader indices Nifty Mid-cap and Small-cap stocks outperformed the benchmarks with 1.6 per cent and 0.6 per cent gains. Nifty Bank lost 2.47 per cent. FMCG, pharma and metal sectors closed with decent gains.

Technically, the Nifty is still trading in the tight range. The critical level of 9,116 protected on a closing basis once again. The Nifty formed another Island reversal after the much-awaited economic package declaration.

The market proved once again that buy on rumours and sell on the news. On Wednesday, it opened with a huge gap up, but failed to fill the gap of previous Island reversal.

It did not sustain initial gains even for an hour. A series of Union Finance Minister's package announcements also did not enthuse the markets. The Nifty is back to a pre-package statement by Prime Minister or closed below the Tuesday's close.

At the same time, the Nifty failed to come out the 9,450-9,116 zone on a closing basis. Barring two days, this zone is prevailing for the past one month.

As the Nifty breached 9,116 twice on intraday basis during the week, the support zone now shifted to 9,043. Unless Thursday's gap filled, we can't be bullish on this market. As long as the two reversal gaps not filled, this market will move in the range again.

Let us examine some of the hidden patterns in the last one price action. There is a bearish head and shoulder pattern if you keenly observe. It is clearly visible on a line chart, which is based on the closing prices.

On the hourly chart, the Nifty formed a broadening formation like a megaphone. This classical technical analysis pattern and it is generally a bearish pattern. In any case, the bounces and moves above the resistance zone and the near-term target are beyond 9,900.

The broadening formation resistance line and 61.8 per cent of prior fall are placed at a confluence point. That is 10,379. This is in the most positive bullish scenario.

Some Elliotticians and Neo wave practitioners, who believe in Glenn Neily method, projecting that there is a possibility of this up move. The condition is, only when the Nifty protects the support zone of 9,040-8,909 points.

Again back to the price and time analysis. As we are arguing the fall from February 20 to March 24 is 21 days. Now, the consolidation is 33 days old. The 161.8 per cent of time comes at 34 days, which is a Fibonacci sequence number.

The Fibonacci time zones are also suggesting that Monday is an important day for the market. Either it should break the support or go up. If at all it breaks the support, then it is almost the end of the tight zone or a consolidation.

In any case, the Nifty closes above the Friday high i.e. 9,183, then there is a possibility of reaching the resistance zone once again. We have to observe the price action at 9,350-9,450 levels keenly.

In the first case, breaking below 8,909 on closing basis any time next week means we are going to test the prior low by July second week as per the Hurst cycles.

The earnings are not impressive in the March quarter. Only one week or ten days in March were affected due to Covid19 lockdown. But the results are mostly not at an expected level.

The Nifty PE is still in an overvalue zone of around 20. The June quarter has almost vanished. Don't expect better earnings in the next two quarters at least. There will be stock-specific action in the sideways market. Be cautious and don't be in a bull trap.

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