Time to book profits, avoid aggressive purchases

The Indian stock market closed positively for the fifth straight week with moderate gains. The market began with a strong note and ended with a strong weakness. The frontline index, Nifty, closed at 17758.45 with 60.30 points or a 0.34 per cent gain. The BSE Sensex also gained by 0.3 per cent. The broader indices, Nifty Midcap-100 and Smallcap-100, advanced by 0.6 per cent and 0.4 per cent, respectively. On the sectoral front, the Realty index is the top gainer with 1.6 per cent, and Energy and FMCG are up by 1.6 per cent and 1.1 per cent, respectively. The Nifty Pharma and Bank Nifty declined by 0.5 per cent and 0.2 per cent. FIIs bought Rs17,970.62 crores, and DIIs sold Rs.6,052.67 crores. The volatility index gained by 3.485 per cent to 18.28.

Finally, at the end of five week winning streak, the benchmark index has given signs of weakness. NSE Nifty closed below the four days low and formed bearish patterns on weekly and daily time frames. On a daily chart, it formed a Bearish Engulfing candle, and on a weekly chart, it formed a Shooting Star candle. We keep cautioning about the trend of maturity and exhaustion. Friday's fall has given a clear reversal signal. We also mentioned that the Nifty behaviour around 18000-100 is crucial for the future trend. As we expected, the index has formed a reversal candle at the swing high; with all probabilities, it may be the intermediate top. As long as it trades below the Friday high of 17992, avoiding the aggressive long positions is better. As the Nifty took support at 8EMA, which is almost at the 16th August gap area support, a breakdown will confirm the bearish implications of the patterns formed at the weekend. It also added a distribution day. Currently, the Nifty holds two distribution days. An increase to five distribution days in the next two weeks means that the market is in a bear grip again.

The Nifty has formed 14 consecutive higher high candles since July 27 (ignore the inside bar on August 5), which is the longest streak in recent times, and importantly it is nothing, but overstretched market. This is one reason for caution last week. All the candles at the swing are bearish in nature. Notably, the Nifty has hesitated to close above the sloping trendline resistance. The index has formed almost parallel high bars in the last three days. Now, the Nifty closed below the previous three bars low. Now we can consider the negative options with the above signals.

When we are open to negative options, we must consider the probable targets on the downside. During earlier downswings, the index retraced 50-78 per cent; initially, it will take a breather. These retracements are violent in nature. We assume that history will also repeat (Technical Analysis based on history repeats Philosophy) this time. The first support is at 17329 (23.6 per cent), 16919 (38.2 per cent), and finally 16587 (50 per cent). In the worst-case scenario, a close below 16256 (61.8 per cent), the Nifty test the previous swing lows (13th May and 8th March) or 15784 (78.6 per cent). I am expecting a base at this level by forming a higher low. If at all, it's a reality, base consolidation will take at least 8-13 weeks.

For now, avoid aggressive purchases and try to take out the profits on the table. The highly cautious approach is the need of the hour. Apply risk and money management practices to protect the capital.

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