Nifty likely to retest 50-DMA level

The April series ended with outstanding gains with whopping 14.4 per cent. The Nifty advanced by 705.5 points or 7.7 per cent gain during the last week.

The BSE Sensex also rose by 7.6 per cent. The broader indices Nifty Midcap-100 and Smallcap -100 advanced by 6.4 per cent and 3 per cent respectively. Almost all sectoral indices registered decent gains. For the past two days, both FIIs and DIIs were net buyers in the market.

Before discussing the future course of market action, let us analyse the price action during the last week. And let us forget about SGX Nifty for a moment.

Thursday's close is a real bullish bar and the indications very positive for the market. With a gap, up opened it has broken out the rising wedge pattern and closed above the 50-DMA. There are now distribution days in the past 25 days.

As we are projecting the bear market rally will go up to 38.2 per cent retracement. The volumes are very encouraging for the past few days. The 31.27 per cent gain from the recent bottom is a rare case in the bear markets.

These factors are giving a sense that we are entering into a bull market again. However, there are many hidden and direct negative implications of the coronavirus pandemic on the global economy.

Now, let's come to the post-April series developments. Sooner after the market close on Thursday, the SGX Nifty started falling and closed with more than 600 points fall by Friday night. Incidentally, there is an announcement of lockdown-3 with more relaxations and exemptions.

The Government feels these relaxations will bring life to the economy with resumed economic activity. As I mentioned in the previous newsletter, the bottoms are made on bad news and the tops made on good news. That is exactly going to happen again. And the history repeats adage is to prove again.

The SGX Nifty closed at 9,303, which is 556 lower than Nifty Thursday close. If we believe the relevance of SGX Nifty, the Nifty will open a big gap down at 9,300 level, which is 5.6 per cent lower.

If we look at the last week's price action, neither bulls nor the bears made money. During the previous week, all the four days, Nifty opened with a gap up and moved in a narrow range. Even on the Thursday though it registered a 300 point gain at the end, it opened with 200 point gap and moved only 100 points during the day.

That is the case with all the previous days. It means that even more than 700 points gain, and intraday traders failed to make money on both sides.

This is another clear example of bear market rallies. People feel missing opportunities on both sides. The stop losses will not work on gap openings. Money and risk management will be extremely difficult in these conditions.

Now, the question is what the direction for the market for the near term. We'll find the answer from the past experience. In 2008, the Nifty gained 25 per cent in three weeks after the leg of fall. Again it fell 20 per cent in the second leg of fall in six weeks.

As I am mentioning the 21-day cycle in previous reports, On Thursday, the cycle is 22-day old. In case, as we discussed above, the Nifty opens at 9,300 level, the market is following the time cycles. Earlier fall is also 21 days old.

If the Nifty unable to recover from the first two hours of trade, those went on long on Thursday, will be forced to wind up positions and will lead to a big selloff again.

On Monday, in any case, Nifty closes below 9,300-9,260 zone, the rising wedge upside breakout considered as a failed one, and eventually, a downside break will be a reality.

In such a case, sooner or later, like in 2008, the prior low will be tested. Prices structure-wise, it also forms a fist lower low in this counter-trend.

After this leg of the down move is over, there will be another leg of upside which may retest the 50-DMA level. It is wise to trade with a light position size and risk management mechanism.

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