It's better to exercise caution in mkt

Nifty closed in positive territory after two weeks of decline on a highly volatile condition. The benchmark index gained by 170 points with promising GDP data and settled at 17196. The Nifty IT outperformed with a 3.6 per cent gain. The pharma index declined by 2.6 per cent. The broader indices Nifty Midcap-100 and Smallcap-100 up by 1.3 per cent and 0.5 per cent, respectively. Broader index Nifty-500 was also up by 1.01 per cent. FIIs sold Rs.39,901.92 crore worth of equities during November. This is the major concern for the market now. The overall market breadth is negative. The VIX also touched 23.82 during the week and finally settled at 18.45.

The market was nervous as Omicron variant of coronavirus spread fears in India. Though the Nifty benchmark index closed one per cent higher last week, a long-legged small body candle indicates indecisiveness about the future move. In a 707 points weekly range, the index is able to close with 170 points gain. As mentioned last week, it reacted from 50 per cent of the prior swing. However, it failed to sustain the decent gains. The earlier swing was tested 61.8 per cent retracement and declined.

At the same time, Nifty also retraced 50 per cent of the prior rally from July 28. The Head and shoulders target(16600) and the 61.8 per cent retracement level(16694) are almost the same. And it is the minimum projection of the target. Currently, it is just holding on to the 100DMA support. If it closes below the 100DMA of 17168-119 zone of support, the down move will resume and meet the above targets.

The pattern formation and the pullback retracements are important at this level. Any retracement of more than 61.8 per cent is a bullish bottom formation like inverted head and shoulders. An ascending triangle kind of pattern will change the market's direction towards the upside. The recent downswing was extended 127.6 per cent of the previous swing. If Nifty fails to surpass the 17489 next week, we can expect a head and shoulders target initially and then at least 100 per cent retracement of 16062.

The 20 and 50 DMAs are in a downtrend. And the 150 DMA is placed at 16579. And the 200DMA is at 16134. These clusters of supports for downtrend will work only as the resting periods. These resting periods are nothing but counter-trend consolidations. Bearish flag will be formed in 5 to 10 bars. The index may also test the 20DMA several times before meeting the 100 per cent extension target. The character of lower tops and lower bottoms in a downtrend is important. A higher bottom and higher top will change the trend structure. In a counter-trend, it will be bearish as long as the lower top and lower bottom are not changed. Every rise will give us the selling opportunities.

On an optimistic note on the markets, we expect the index to undergo a base formation in the broader range of 17500-16600, wherein stock-specific action will continue. Since May 2020, the index has not corrected more than 10 per cent. In the current scenario, 10 per cent correction from a life-high of 18600 will mature at 16740.

As the RBI monetary policy is scheduled this week, it is better to approach the market cautiously, as the daily ranges and the volatility increase. It is extremely difficult to trade on any time frame in this support and resistance zone unless we can take swift swing actions. Avoid larger leveraged positions on either side.

(The author is a financial journalist and technical analyst)