Stock-specific volatility will continue

Indian stock market witnessed a profit booking towards the weekend. The Nifty gained a tiny 17.55 points or 0.15 per cent, and another benchmark index BSE Sensex gained a mere 0.4 per cent during the last week. After oscillating in range with a positive start, the index ended with a negative note.

Global rating agency Moody's downgraded the country's growth rate as it sees there are a lot for fiscal headwinds. The broader indices Nifty500 fell by 0.21 per cent.

Midcap 100 and Smallcap 100 indices also registered 0.1 and 0.8 per cent loss respectively. On the sectoral front, barring Nifty Bank and Nifty Realty, all other sectoral indices closed in negative zone.

The BankNifty gained by 0.4 per cent and Realty index closed with a 1.7 per cent. The Realty sector stocks gained as the government announced another Rs 25,000 crore booster package for the sector.

Technically, after reaching near to the prior lifetime high with several bearish bars, the indices finally closed with a big negative bar with adding a distribution day.

The massive profit booking was due to the international rating agency Moody's downgrading and disappointing Q2 financial results. It is also closed much below the prior bar low and formed a shooting star on a weekly chart.

Though the market is near to the lifetime high, the negative divergence is not yet negated on the weekly chart.

After a massive 931 point or 8.4 per cent rally from October 9 lows in just 20 trading sessions without meaningful correction, the Nifty is looking tired at the current juncture.

It closed above the 5th July swing high for just one day with a bearish hanging man pattern. Generally, any kind of steep rise in price will sustain for a long period without some correction at the point of time.

I think the time has come to a meaningful correction in the market as there are no earning surprises as expected earlier. On Friday, Nifty took support at 8 EMA for the seventh time in the last 20 days.

This is a rare phenomenon of support. If this support of 11,890 breaks, the market may witness a massive long unwinding or a fresh selling pressure. As the leading indicator RSI is moving in a tight range channel since October 9.

Along with the weekly charts, the short term, the hourly chart is also showing a negative divergence in the market. It is also turning down from the overbought condition. The Stochastic Oscillator also has been in the overbought condition during the past 20 days of upside rally.

Such a long-overbought condition in an oscillator is also a rare phenomenon. Another indication of the tiredness in the market is that even though price is consistently moving up, the MACD histogram is continuously coming down.

The MACD histogram is more powerful than any other also indication market is poised for a correction. Unless it moves above the prior high of 12,034 and closes above, the rally may not continue further.

For any fresh long positions in the index, wait for that condition. But, if the Nifty closes below the last week's range low of 11,850 or 8EMA 11892, the market will witness the correction, as the market in an overbought condition.

Interestingly the trendline of recent lows also acted as a support for at least three times from 19th September. This trendline' next support is also placed near 11,850.

The 23.6 retracement level of last 20 days rally is placed at 11,812. A fall below this level leads to further fall up to 11,670, which is a prior resistance level.

If this support level does not hold, then market will turn into an intermediate bearish tone with next-level support at 11,450. Be cautious about existing and fresh longs and hold them with trailing stop loss of 11,850.

As there are no positive surprises and more of disappointments in Q2 earnings, the stock-specific volatility will continue. The derivative data also suggesting that 12,000 level is a Herculean task to overcome.

(The author is a financial journalist and technical

analyst. He can be reached at tbchary@gmail.com)