Price pattern still within broadening formation

On Monday, the domestic equity markets opened with a positive gap, trading mostly in the range with higher volatility. The benchmark index, NSE Nifty gained 414.15 points or 2.56 per cent. The BSE Sensex was higher by 1.6 per cent. The Broader indices, Nifty Midcap-100, is up by 1.3 per cent and the Smallcap-100 index advanced by 4.4 per cent. On the sectoral front, the Nifty Realty and IT indices are up by 4.9 per cent and 4.4 per cent, respectively. The Nifty Pharma and FinNifty are down b 1.9 per cent and 0.9 per cent. The India VIX is down by 7 per cent to 19.98. During the last month, FIIs sold massively by Rs.54,292.47 crore. In the first three days of the current month (3 days) they sold Rs.6,152.49 crores. The DIIs bought Rs.3,475.25 crores.

Two weeks of consolidation broken with a positive gap opening. It filled the 6th May big gap on opening. But the Nifty failed to close above the Monday high. Friday's huge gap opening was not sustained as the selling pressure resumed at higher levels. It registered a breakout on a lower time frame, which failed within one hour. As the fall was severe, the Nifty formed a big bearish candle. The daily candle looks like a dark cloud cover. On a weekly chart, it formed a long upper shadow, and the candle signifies the profit booking at higher levels and a lack of conviction on the upside. It faced resistance at a 61.8 per cent retracement level. The 50DMA is still 1.7 per cent away and in the downtrend. The 200DMA further flattened. As we discussed earlier, there can be some bounces when the price is notably below the key moving averages. Generally, prices will not move far from the short and medium-term averages. These bounces are short-lived in any trend. And some bounces are deceiving and seductive.

The Nifty almost tested the prior supports, which were once bases. The price pattern is still within the broadening formation. If we look at the 75-minute chart, the Nifty is reacting from the counter-trend channels resistance line. The MACD line has serious negative divergence. This gives us some insights into the future trend. The price action over the last five days is mischievous. On Tuesday, it formed an inside bar and a Doji candle. These both got the confirmation for the bearish implications. But, the very next day, a Bullish Engulfing gave a reversal signal. But, though it opened with a big positive gap, the index registered a failed breakout. Almost all the positions on either hit a stop loss. These kinds of deceiving moves are characteristics of bear market rallies. On a daily 14-period, RSI has formed a negative divergence. It failed to move above the 55 zone, to strengthen the trend. MACD histogram shows a decline in bullish momentum. The Anchored VWAP acted as a resistance on Friday. The Commodity Channel Index (CCI) has reached an overbought condition and prior swing highs. This indicates the topping signs in the index. As the pattern breakout target met more than 62 per cent, it will be wise to wait for further directional bias.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)