Overextended rally showing exhaustion

The domestic equity market snapped its five-week winning streak. The benchmark index Nifty ended with 199.5 points or 1.12 per cent and settled below 17600. BSE Sensex also declined by 1.4 per cent. The broader market indices- Nifty Midcap-100 and Smallcap-100- outperformed by 1.5 per cent and 2.9 per cent, respectively. On the sectoral front, the Nifty IT index declined by 4.5 per cent and the Pharma index down by 1.7 per cent. Nifty PSU Bank index gained by 4.4 per cent. After volatile swings, the Volatility index India VIX closed flat at 18.22. FIIs slow down the buying during the week. Overall, Rs18,420.98 crores in this month. DIIs sold Rs 6,555.99 crores.

The Nifty opened with a big negative day last week and ended with an inside bar. Between these two candles, the index has consolidated in a range. Previous week's Shooting Star candle gets confirmation for its bearish implications by closing below the last week's low. With this low close, as mentioned last weekly report, with all probabilities, 17992 is the intermediate top. The mid-week recovery was not sustained till the weekend. It almost tested the 23.6 per cent retracement level of the prior trend. Now, this 17329 level is a target for the bearish flag on an hourly time frame. The sudden 1000-point fall in Dow has rattled all. But, it is not sudden. I have been cautioning about the counter-trend rally and its implications for the last four weeks. As expected, the fall is impulsive and violent. An overextended rally had shown the exhaustion for the last three weeks. As Nifty got the confirmations for the all bearish pattern implications, now we need to concentrate on the downside strategies. On Monday, it may open at 17329, with all probabilities. There may be some intraday pullbacks. The external factors like inflationary pressures, rise in interest rates and rise in the Dollar index will dampen the market sentiment. All these have an inverse relationship with equities.

The Federal Reserve's Chairman Powell's Jackson Hole press conference made it clear that it is a definitive end to quantitative easing and we have already entered in Quantitative Tightening phase. This will impact the risk assets like equities. The Dow and S&P 500 indices closed below the 38.2 retracement levels of the prior rally. Earlier, they just retraced less than 50 per cent. This current correction of two major global indices can extend up to the below 3900 and even can test the below prior low. At the same time, our benchmark indices retraced 80 per cent. This outperformance is because of the rally in growth stocks and perfect sector rotation.

Another crucial factor for emerging markets is the rising Dollar index. It closed at 20 years high by testing above $109.27. This is a big caution for all emerging markets. It met our short-term target as forecasted, and the next target is $121 in the medium term. The USDINR target is intact at Rs.81 in the short term. It has already resumed its upward move and closed almost the six-week high.

Now, the question is whether the outperformance of Indian equities will continue. As I mentioned last, the fresh down leg is the last leg of the fall in the ongoing bear market. This downward journey target is near the 14000 zone. Its downside swing will have at least three counter-trend rallies or consolidations. In any case, if the Nifty closes below 17329 in the next two days, the fall will be sharper towards 16919 within no time. For all practical purposes, the Nifty may not cross 17727 for now. For all the bearish views, this will be the ultimate stop loss.

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