Markets still in choppy waters

The optimistic week in recent time ended with a dull note. From Tuesday's low, Nifty recovered more than 1,500 points or 20 per cent. But, after RBI's monetary policy announcement, the market erased most of the gains and closed flat on Friday. On a weekly basis, the Nifty closed with just 85 points or 0.97 per cent loss. Another benchmark index BSE Sensex also closed with a 0.3 per cent loss. The broader market indices Nifty Midcap-100 and Smallcap-100 closed with 6.9 per cent and 7.9 per cent loss respectively. Barring Nifty IT index (2.1 per cent gain), all the sectoral indices closed with a negative bias.

Last week, despite being in a bearish territory, markets witnessed a relief rally on the hopes of stimulus packages from the Centre. Interestingly, markets gave up the gains on the day when RBI came out with its boldest monetary policy announcement recent years This is an example of "Buy on rumours and sell on news". The market course last week is also a testimony to the fact that market rallies during bearish conditions are like surging tides which are destined to calm down later.

Even after a 20 per cent surge from the bottom in just four days, Nifty failed to close above the 23.6 retracement. It also failed to close prior bar's high on a weekly basis. Meanwhile, the Dow Jones index of US market registered the highest gain in three days before tumbling after the $2 trillion stimulus package. After testing the 38.2 retracement level, it reversed with a shooting star kind pattern. Even the US market also endorsed the "Sell on News".

As I mentioned earlier, most of the bear market rallies ended with 38.2 per cent or 50 per cent retracement. Indian market is struggling to cross the bare minimum of 23.6 per cent retracement levels. Now the question is what next? The daily range of Nifty is coming down from 800 points to 500 points. With this contraction of range, the Bollinger Bands are also just started narrowing. In another way, the market is entering into a small consolidation. Now, 7511-9039 has become a critical range for Nifty. As long as these levels are protected, the market will consolidate.

Generally, the countertrend consolidations will take 1-3 weeks time. As one week has already passed away, the bigger question is at which level the counter-trend will take U-turn. If Nifty sustains above 8,672, there is every possibility of it testing 9,390. But the countertrend will end if Nifty closes below 8454. But if Nifty breaks 7,511 level, the downfall will start with renewed energy and fall like a fireball, ending the consolidation phase.

The market already entered into category-3 bear phase by falling more than 34 per cent. If the correction continues, the fall will be at least 50 per cent from its top, which stands at 6,215. Interestingly, the 61.8 per cent retracement of the 2008-2002 bull market is at 6,140. Before reaching this level, the market may take rest near 6,825.

The IMF has declared that the world is in a recession, which will be more painful than 2009. The world markets are experiencing more severe fall than 2008 and resembling the 1987 flash crash. As the governments already declared the maximum level of stimulus packages to mitigate the crisis, so we can't expect any good news in near term. Besides, we can't also expect the earnings push in the near future. Earnings season may be delayed as the government allowed companies to postpone board meetings.

Delayed or deteriorated earnings can't help the markets. Even after 40 per cent correction, the Nifty PE is at 19.52 level, which is still near the overvalue zone. So, there is clarity on the future at the current juncture. When uncertainty looms large, it is a foolish effort to find the bottom.

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