Charts indicate huge volatility amid monthly expiry ahead

The benchmark indices closed lower for the third consecutive week in a very volatile week. Opened with the gap down on Monday and the Nifty tumbled by over 3 per cent at the beginning of the week. The one-day recovery on Thursday is short covering one. On Friday, it again opened with a gap down. Finally closed at the week's low. After 590 points volatile moves, the Nifty closed with 303 points or a 1.73 per cent decline. On a weekly basis Nifty Auto was up by 3.1 per cent, and the Energy index gained by 2.4 per cent. The remaining sectoral indices declined. Overall, the market breadth is negative. FIIs are selling continuously, except for three days this month. They dumped Rs.29,206.19 crore worth of equities, and the DIIs bought 20,166.48 crores.

With the volatility, the Nifty has formed the second long-legged Doji candle in three weeks. It declined below the 20-week average. Added distribution days and given several negative indications on the direction. Though it formed an indecisive candle, it closed at almost six weeks low. During the last three weeks, every recovery effort has been used as a selling opportunity. The Doji candles, gap down openings and the high volatile moves are the characteristics of the bear markets. Generally, the indices close near the day's lows in a bear market, and in a bull market, they close at the highs. This is exactly happening now.

The Nifty opened below the 21 EMA last week. On Thursday, with the gap-filling effort, it closed above the 21EMA but failed to sustain the next day. As the Nifty ended below the prior day's high, it is a weaker sign. Closing below the 200 DMA again is another weaker sign. Even on Friday, after opening with a gap down, The index tried to fill the day's gap, but the late flash sell-off forced it to close near the day low.

The 20DMA entered into a downtrend after flattening for four days. The 50DMA is already in a downtrend. Closing below the 38.2 per cent retracement level (17181) of the prior upswing is a confirmation to the end of the upside move. With this, the 18114 level is the short term top and the second lower high. As per the Dow Theory, the second lower high is the confirmation of the long term downtrend. There are two lower lows already in place. There is a higher probability of testing the 16600 level next week. This could be the short-term support, and a bounce from this level can test the 17200-500 zone of fresh resistance. In any case, the Nifty fails to bounce towards 17200 levels; that could be a sign of a strong bear case. In such a case, it will trigger a steeper fall towards the 15000 level in the coming months.

As the Nifty is formed a descending broadening triangle formation, the 15000 level will act as very strong support for the market. There is another support at 14695, where the valuation game starts, as they look moderately attractive. Currently, the FIIs feel the Indian market is expensive. As per their investment picks and exits, the consumer discretionary and the IT sectors are expensive, and currently, they are focusing on industrials and capital goods sectors. As the NPA cycle is behind us, the banks and financial services sectors will benefit in the next leg of the bull market rally. The final bear attack will take the Nifty toward 13800-900, which is a smaller decline. 13800-14500 zone will have a bottom formation exercise, where the earnings growth cycle will begin a new chapter and will give new buying opportunities.

Next week is a monthly expiry and will experience huge volatility. The 50DMA support is at 17129. There is a high probability of opening below the level, as the global ended sharply lower on Friday. The Dow closed below the five-week low. Below the 17129, the next level of support is at 16893, and the previous low is at 16824. As mentioned above, a breach of this support will lead to a fall towards 16600. There is little scope for runaway rally in the coming days. Exit some of the shorts at the 16800-600 zone, as a technical pullback is possible. It is better to approach a safe trading style with prudent risk management.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)