Higher volatility for Nifty amid monthly F&O expiry

On a most volatile week, the benchmark indices ended on a positive note. The Nifty gained by 484 points or 3.07 per cent. The BSE Sensex is up by 2.9 per cent. The broader indices, Nifty Smallcap-100 outperformed by 3.9 per cent, and the Midcap-100 gained by 2.9 per cent. The Nifty IT is a loner loser with 2.82 per cent. The Metal index is the top gainer with 7.4 per cent. The Auto and Realty indices are other top gainers with 4.8 per cent and 4.3 per cent, respectively. FIIs sold Rs.44,102.37 crore, is the highest-selling after February. The DIIs bought Rs36,208.27 crore. After over 45 per cent volatility, the VIX finally closed with a decline of just 1.8 per cent at 23.10.

The equity market has witnessed two most gaining days and one of the sharpest declines in the last three months. Almost every positional trade has hit a stop loss on both sides. On a weekly chart, it formed an inside bar, but a bullish candle near to the previous lows. The index will give little more retracement, only a close above the previous week's high. During the last week, the Nifty has experienced huge gap openings on both sides. It has not formed a lower low yet, forming parallel highs around 16283-400. The last six days of price action look like a base formation, which almost resembles the previous base in the ongoing downswing. The only difference is the size of the bar. Gaps are common on both bases. Even after two days of massive move attempts, the index failed to close above the 23.6 per cent retracement level of the prior trend. There are several resistances in 16283-623. Apart from the parallel highs, it has 20 DMA resistance at 16513, and the gap area resistance is at 16623. Before that, it has two parallel highs at 16283 and 16400. These levels have been breached to erase the bearish bias present in the market. On the downside, the 15800-735 zone of support of the current base is crucial. In any case, declines below this zone, the prior major low is at 15671, which may act as strong resistance. Below the 15800-671 zone, it will form another major low around 15290 and 15150, which is broadening the triangle's support area.

The index is trading below all key moving averages. The curvature of these averages is changing during the last seven days. The 20 DMA is still in a steep downtrend. The 200 DMA flattened after turning it down. The 50 DMA just flattened. The 100 and 150 DMAs are still in a downtrend. The 20 Weekly moving average is also in the downtrend. As most of the moving averages are in a downtrend or none of the averages are in an uptrend, the market direction is also on the downside, though the index has formed a base. The high volatile moves with the gaps are common during the downtrend.

On a line chart on a daily scale, the price pattern is like a double bottom, with the valley point at 16283. The previous base was a pennant. Generally, the double breakouts retrace about 61.8 per cent of the prior swing. Now, a close above 16283 will lead to a swing up to 16686, and it may test the prior base bottom of 16930 at maximum. This is the most optimistic bull case scenario.

Next week is the monthly derivative expiry, and the volatility will be on the higher side. The daily trading ranges will increase. As the RSI broke out of the downward channel, expect some neutral to positive opening next week. It closed above its 20 periods average. Look for the price behaviour around the 50 zone. If the RSI closes above 50, there is a chance of testing 16686. The daily MACD histogram shows a decline in bearish momentum in the flat base zone. The Nifty mostly trades within specified price zone with increased volatility. Before resuming the downtrend, it will consolidate for a period. As there is no confirmation for a potential double breakout, keep the position size light for now. The stock activity will increase next week.

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