Markets still in uncertain territory

NSE Nifty registered a weekly gain after seven weeks of decline. It gained over 12.7 per cent or 1,029 points in the last three trading sessions. The week started with a strong gain of 708 points followed by a high volatile session on Wednesday. Finally, it ended with another massive gain of 4.15 per cent on Thursday. BSE Sensex also gained over 12.9 per cent. The broader indices Nifty Midcap-100 move up 10.9 per cent while Smallcap-100 index rose by 9.6 per cent. All the sectoral indices registered a considerable gain of over 10 per cent. The Nifty Auto index gained by 23.1 per cent and Pharma index rose by 19.4 per cent. Nifty Bank registered a 14 per cent rally. FIIs bought all three days during the week.

However, Nifty's 12 per cent rally in just three days, surprised many. Of the three trading sessions, the Nifty registered big gains on two days. Firstly, let's discuss some positives of the last week. In a second attempt, Nifty was able close above the valley point of a double bottom. The Nifty also closed above the 23.6 retracement of the prior decline from the lifetime high. The RSI (47.64) has also come out of the oversold condition and reached to a mild bullish zone. The MACD histogram is also showing bullish momentum. Importantly, all the sectoral indices closed with good gains and market breadth also improved. In a normal condition with these evidences ,one can initiate long positions.

But there are many barriers to cross. In 2008, Nifty bounced 25 per cent in just two weeks. Later it consolidated within this zone and fell sharply in the second leg. Now, Nifty seems to be following similar pattern. On a long-term chart, Nifty exactly reached the 11-year upward channel support line. This is nothing but a retesting of the breakdown level. Normally, after a breakout or break down, the price will retest and continue its prior trend. In that case, now it has to restart its journey to downwards. There multiple confluence resistance points between 9147-9390. This zone is critical for next week. If the Nifty moves above the 9m390 level, the next significant resistance zone is placed at 99,70-10,551. It may take a longer time than the current swing to reach this level. At the same time, these levels can not be reached at a stretch. There will be some pullbacks. This is also not an easy task. Also, historical trend indicates that the pullbacks will not go beyond 25 per cent in category-3 corrections.

Most bear markets lasted for 13 -21 months. Bear markets during 1992-93, 1997-98, 2008-09 and 2010-11 year lasted for 13 months. Whereas, bear markets in 1986-88, 2000-01 and 2015-16 continued for 21 months. Surprisingly, these durations are Fibonacci numbers. Now, markets entered the third month of correction. Another interesting observation is that the fall is ended on a 21st day, from 20th February to 24th March. On 24th March the nationwide lockdown started. Now the counter-trend is 10 days old. Will the counter trend rally end on 13th or 21st day? The time will tell. So long as the March 24th low of 7,551 is not broken, we consider that we are in counter-trend consolidation only. If we look at an hourly chart, it is exactly forming a flag pattern. The resistance points for this flag are at 9,225 and 9,640. For a bearish move, Nifty must close below the prior bar low (8,904). This has to be followed by a close below 8749. Then we will get a confirmation for a bearish move. As long as this does not happen, it is better to avoid shorts positions on the index.

Fundamentally, Nifty is now trading at 20.53 PE. As earnings by listed companies are unlikely to improve, we can't expect the PE to come down to the investment level. When Nifty PE comes down to around 15 or below, the index will enter an investment territory. As the capacity utilisations are at a record low level at 25 per cent, we can expect earnings to be very poor. The relief rally is not reflecting the economic situation. Therefore, anything can happen.

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