Markets likely to consolidate this week

The last week began a follow-through buying after Friday's big surge in the market history. Later, the market started consolidating within the range. Overall, Nifty gained about 2.1 per cent or 238 points in the week.

The Sensex rose by 2.1 per cent. But the broader market underperformed compared to benchmark indices. Nifty Midcap-100 fell by 0.4 per cent and Smallcap 100 gained by 0.7 per cent.

On the sectoral front, Nifty private bank and FMCG indices were in the forefront with 4.1 per cent and 4 per cent upswing, respectively. PSU Bank index declined by 5.8 per cent and Pharma index lost about 3.6 per cent.

Technically, Nifty is in uptrend. It retraced almost 23.6 per cent of last Friday and Monday gain. It also closed 30 points lower to the Monday open and formed longed legged Doji on a weekly chart.

Even though the benchmark indices are still not given-up any significant gains, the Mid and Small caps underperformed since Monday. The market breadth is also not so great and market was on decline on many days.

Now the Nifty is oscillating at 61.8 retracement of 3rd June - 23rd August fall. As I mentioned last week, the consolidation is four days old and it may continue a few more days before taking another decisive move.

As the gap of Monday still not filled, there is a higher probability filling this gap next week. Any fall below 11300-290 zone will lead to bearishness in the market.

The important observation is that Nifty is currently trading at a multiple confluence point. Firstly, Monday's move faced stiff resistance at Nov-July upward channel support area. Secondly, the same support line is also meeting the sloping trend line or a connection 3rd June high to 5th July high.

Interestingly similar slopping resistance line worked as support at several times at the bottoms of 14th May, 5th August. These two channels confluence is at 11690 level.

This level will be critical point for the next few days. If Nifty moves beyond this level, the up-move will resume and with faster retracement.

This faster move will test the prior lifetime highs. If the Nifty fail to break Monday's high of 11695 on a closing basis and falls below the 5th August and 19th Sept consolidation or simply closing below the 11180 level, there is a high probability of testing the prior lows.

With the current price action and indecision at the higher levels, the market seems to be digesting the two days historical surge. Once this euphoria eases out, the market will take its own time to find the path.

The indicators suggest some tiredness in the marker. The stochastic oscillator reached the overbought condition and %K is below the %D. This indicates the short-term bull strength is weakening. If the RSI falls below the 59 levels, it will form a lower low.

This means that the weakness in the market is increasing. Monday is also monthly, quarterly and half yearly closing for the markets. On a half yearly chart and quarterly charts, Nifty is forming bearish hanging man candles which suggests that the bears are not out of the market. Any close below 11,665 also leads to a bearish engulfing as well in the quarterly chart.

Long term trend will change to bullish above 11,700 and close below 11,180 will resume the downtrend. The second-quarter results are just a week away; traders will wait and watch for the bottom line effect of recent corporate tax.

Any kind of quantum jump will take the market to new highs. If corporate tax cut fails to improve earnings, then the market will definitely go into the hands of bears.

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