Break below 8,900 deeper trouble for market

The NSE Nifty closed in a negative zone for the week after two successive weekly gains. The negative sentiment was prevailing all around the market because of the debacle of Franklin Templeton debt funds.

Further, no signs of the economic package from the Government, a drastic fall in insurance premiums and oil market collapse dampened the market sentiment. The Nifty lost 112.35 points of 1.21 per cent during last week.

The BSE Sensex declined by 0.8 per cent. The broader indices -- Nifty Midcap-100 and Smallcap-100 -- declined by 2.9 per cent and 3.3 per cent respectively. Barring Nifty Pharma with 3.9 per cent, IT with 0.9 per cent gained and all the other sectors fell sharply.

Nifty Metal is the worst performer with 9.6 per cent, and Nifty PVT Bank index declined by 6.3 per cent. FIIs were the net sellers during the week. The advance-decline ratio once again deteriorated on Friday.

We are discussing counter-trend rallies in the bear market and the importance of 38.2 retracement level. On Monday, precisely after touching that level, it again turned down within the range. Since March 27, the Nifty has been oscillating around 9,000 levels.

And for the past nine trading sessions, it is hovering around 8,900-9,300. The fall from February 20 took 21 days to find a bottom at 7,551 on March 24. The 39.56 per cent decline from the lifetime highs took 45 sessions.

I also mentioned that the bear market rallies did not sustain above 20-25 per cent gain from the bottom. The Nifty already registered 25 per cent gain from the March 24 bottom on Monday.

With these evidences of 38.2 per cent retracement and 25 per cent rally from the bottom, we can assume that the bear market rally is at a mature stage. To validate this assumption, many other clues are confirming the above hypothesis.

Firstly, simple to understand is that the Friday bar closed below the prior bar and formed a gravestone Doji at resistance. This price action itself is an indication of the counter-trend consolidation is at a mature stage.

Secondly, it created a lower high in a minor trend at 9,343. Thirdly and most importantly, the RSI never go beyond 50-60 range in a bear market rallies. At least for four days, it was at 50-51.5 zone, and with Friday's fall, it came back to below 50.

Look at the other momentum indicator MACD, even though the price is not moving much lower the histogram is cooling off since April 20, when Nifty reached 38.2 retracement level of 9,390. This exhaustion is indicating that the upside momentum is waning.

The other most important indicator, which illustrates the strength of the trend, Directional Movement Indicator (DMI) now in a critical juncture as all the components are merging.

Whenever this kind of set up is in place, expect an explosive move on either side. ADX is coming down during the counter-trend. It is proven again that, the counter-trends generally weak ones.

On the other hand, the Nifty is approaching support of the rising wedge. A 10 to 20 point decline on a closing basis enough for rising wedge breakdown. The Wedge breakdown is nothing, but a confirmation for the end of consolidation.

In such case, as I mentioned in the previous report, the bears' will come back with full strength and any fall will be a sharper one.

The strategy is simple to implement now. As long as 9,390 is not taken out decisively avoid long positions. The break below 9,000-8,900 will be deeper trouble for the market.

In any case, the Nifty closes below 8,672 next week we can test 6,825 sooner or later. Be with a cautious approach to buying the equities.

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