Exit on every rally in current confirmed bear market

The weakness persisted in the market during the last week. After opening with a big gap down, it sustained below the opening for the entire week. The Nifty lost 608.40 points or 6.17 per cent last week. Another benchmark index BSE Sensex lost 6.2 per cent. The broader market indices Nifty mid-cap and small-cap indices lost 5.3 per cent and 4.1 per cent respectively. Barring Pharma index, which closed with 0.17 per cent gain, all the sectoral indices were down by 8.10 per cent each. The market breadth is very negative during the week.

The market movement confused most of the traders and market Pandits after opening with a big gap down. Mostly, it traded in a range, and supports were not broken. At the same time, the big boys of the market like Reliance kept bulls hopes alive. A simple classical technical analysis tells us many stories now. For the last few weeks, we were suspecting the counter-trend consolidation will end at 38.2 or 50 per cent retracement levels with a proven historical evidence. It exactly retraced from 50 per cent retracement of prior downswing from February 14 to March 24. It was also coming down from the 50-DMA level. With the rising wedge breakout on the upside on April 30, many turned to a bullish stance.

At the same time, the Nifty yet give a clear signal of bearish strength. The 20-DMA was acting as strong support for the past three days. To get a trend reversal signal, it needs to close below the prior swing low. This is not yet happened. Only below these two strong supports, the Nifty can sharply move down. The next level of supports is placed at 8,909 and 8,700. An aggressive sell-off can be witnessed below these levels. On Friday, Nifty attempted to cross 9,350 levels for several times, but efforts ended up with disappointment. From Tuesday onwards this level has become a stiffer resistance. Unless the opening high of Tuesday 9,450 taken out, we can't expect the market to be in bulls dominant. Above 9,350-9,450 zone, the market will try to test the 50 retracement level again.

In other words, the market is in a critical phase. Historically, as we mentioned earlier, the bear market retracement extended to 38.2 to 50 per cent retracement levels. As we are almost tested the 50 per cent retracement with a small margin, there are very meagre chances of reaching 9,978 levels. As we already consumed 28 days of counter-trend consolidation, we can hardly extend up to another eight days in this phase. This 34-day counter-trend consolidation is 161.8 per cent of the time of fall from February 14, which is 21-day decline.

Generally, the bear markets in recessionary times limited to 13 to 21 months. All the bear markets ended within these periods. We hear about more significant depression than 1929-30 as projected by international agencies. In such a case, the bear market will extend more than 21 months, which happened only once in the history in 1929-30. Fundamentally, we are still high price-earnings (PE) ratio of 21.28, which is almost equal to the early March or beginning of the fall.

The earnings will further deteriorate as April month registered as zero sales in many industries including automobile. Don't expect earnings growth for at least 2-3 quarters from now. In such a scenario, even the current valuations are very expensive. We are in a confirmed bear market, and every rally is an opportunity to get out of the market.

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