Markets under bearing grip after RBI's policy

The disappointing monetary policy by the Reserve Bank of India and concerns over growth rate fuelled the fall of markets from lifetime highs. Though the fall is limited on the day of RBI policy, during weekend the benchmark indices fell by almost one per cent.

The Nifty lost 134.55 points or 1.12 per cent in the last week. The BSE Sensex lost 0.9 per cent. The Midcap and Small-cap indices fell mostly by 2.9 per cent and 2 per cent, respectively.

On the sectoral front, Nifty PSUBank index fell by 7.8 per cent, which was the worst performer last week.

Auto and Metal indices felly 3.5 and 3.4 per cent respectively. Nifty IT index gained by 1.9 per cent and Realty by 0.5 per cent.

RBI revised its growth forecast to 5 per cent and maintained on the status quo on policy rates.

As suspected last week, more and more bearish signs are now turning into reality. The Nifty added one distribution day and closed below the 21 EMA. Another two distribution days and closing below the 50DMA will change direction to a downtrend in the market.

The Nifty formed a bearish belt hold and bearish engulfing pattern on a weekly chart. It tested the November 22 low and wiped out all gains of last week. Even in Jan and September 2018 also, Nifty formed bearish engulfing patterns.

After these bearish engulfing patterns in Jan-Mar 2018 period, Nifty fell 10.42 per cent and in Sept-Oct 2018, Nifty fell by 14.87 per cent.

Interestingly, from Oct 9 – Nov 28, in a 1069-point rally, Nifty never fell below 38.2 per cent of the earlier upswing. But the current fall is more than 61.8 per cent of the Nov 14-28, 356-point rally. This is could be the first confirmation for an intermediate top.

As I suspected last week, the negative divergences in the major indicators have been confirmed in the last week. The RSI closed below the 59 levels and has broken down in a descending triangle kind of a pattern. It also broke the long up trending channel as well.

The next level of support is at 47 levels. Historically, Nifty took support at 40-45 zone in the RSI. Let us watch this time, whether the support holds, or will it reach an oversold condition or below 30 levels.

On a weekly chart, RSI actually broke out the downward channel last week. But it was unable to sustain above the channel and fell again into the channel.

This is a sign of a failed breakout as we discussed in price last week. We can expect some small bounces in an ongoing down move. Any up move must breach the prior swing high to negate the intermediate downtrend.

The MACD histogram is suggesting further bearish momentum in the benchmark index. In the most popular moving average based trade set up by Daryl Guppy's MMA, the short-term indications turned negative.

Another moving average based strategy by John Ehlers MESA Adaptive moving averages (MAMA&FAMA) is also giving a short term sell signal.

Another strategy setup John Ehlers, the Instantaneous Trend line has given a sell signal on November 29th itself. The directional movement signalled the sell as -DI has reached above the +DI.

It also shows that the uptrend is weakened or under pressure as the ADX value is coming down. With this technical evidence, the long positions might be exited and keep Thursday's high (12081) as a stop loss for short positions.

Fresh long can be taken only above 12137. The immediate critical support is placed at 11802, and the prior swing low is at 50DMA (11734). If these levels are taken out with adding two distribution days at least, the market will turn into a downtrend - in other words, bears will control the market.

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