Bullish conditions waning quickly

The benchmark indices declined heavily during the last week as the trade war intensified between the US and China and the general election results are getting closer.

Before the event risks, traders preferred to book profits at higher levels and stay in sideways. The Nifty lost 3.7 per cent while the Sensex declined by 3.9 per cent.

Both the indices added another market day on Friday. All the sectors showed weakness during the last week. The Nifty Metal index fell by 6.8 per cent and energy index declined by 6.5 per cent.

Only the Nifty IT index showed some resilience during the week with a 0.9 per cent loss. Nifty fell 577 points or 4.87 per cent from a recent top of 11,856.15.

As we mentioned earlier, after testing several times 11,761 level, moving in sideways, the bulls lost confidence and control on the market.

It never closed above 11,761 on a weekly basis. The Nifty almost corrected 50 per cent of the 20th February to 18 April rally in just 13 trading sessions.

It also closed below the 50DMA which is the first sign of weakness in an intermediate uptrend. The 100EMA support is placed at 11,230 which very near to the current level.

The RSI violated the historical support of 40 and reached to 35.87 on Friday. A serious distribution happened last week as volumes recorded above the 50-week average.

The fall in Nifty extended to eight days. Historically, most of the falls ended between 8-9 days. Let us wait and see whether this fall will end in the next one or two days.

As most of the indicators already reached oversold condition or near to that, one can expect a short-term bounce. As derivative data suggests, there is the highest probability of short covering bounce. The MACD entered into below zeroline zone and the histogram is showing negative momentum picking up.

The directional momentum indicator ADX is also reached below the -DI. This shows that the bullish strength in a market is waning quickly. Only the Stochastic oscillator at extreme oversold condition is indicating a bounce in the market.

In this condition, any fresh shorts are not desirable and at the same point, positional longs will also be risky.

Another noteworthy observation is that Nifty almost reached to the gap area 11,180-11,227 of 12 March. It is also a breakout area of four months long consolidation.

The 61.8 per cent retracement of the last two months rally also placed at 11,071, which is also near to the 200DMA(11,030). In any case, if Nifty falls below this level and into this consolidation area, we can assume that it is the beginning of the serious downtrend.

As of now, Nifty must bounce from the gap area to protect from the dangers of a downtrend. Watch the determination in expected bounce and momentum of bounce.

If we see a faster upmove with huge buying interest, it can bring back the confidence in bulls. Otherwise, any bounce is selling opportunity. If the bounce is able to sustain above 11482 level for at least two days.

It means it can retest or come closer to the recent highs. I think the market is expecting an uncertain outcome from general elections. In 2014, at least 10 weeks before results, the Nifty had broken out the consolidation and then lifetime highs.

Even though we are near to lifetime highs (5percent), the patterns are not similar to 2014. In any case, on a positive side, if it breaks the 11761 on a weekly basis, we will see 12,200 immediately and 14,000 in next one year.

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