Trim your leveraged positions ahead of volatile week

With negative global sentiment and broad-based profit booking at higher levels, the Indian equity market snapped its two-week winning streak. The benchmark index NSE Nifty declined by 302.5 points or 1.69 per cent during the last week. BSE Sensex is down by 1.6 per cent. Even the broader indices, Nifty Midcap-100 and Smallcap-100 fell by 1.7 per cent and 1.2 per cent respectively. The Nifty Metal and Bank Nifty are up by 1.8 per cent and 0.9 per cent, respectively. The Nifty IT was the worst performer with a seven per cent decline. Nifty Auto, FMCG, Pharma and Realty indices were down by 1.5 per cent to 3 per cent respectively. FIIs once again began profit booking in the last three days by selling Rs5,928.24 crore. Overall, they bought Rs1,915.95 crore to date this month. DIIs sold Rs3,006.50 crore worth of equities.

As we suspected last week, the outperformance of our market seems to end. Last week's over three per cent decline in just two days has initiated many bearish outcomes. The frontline index, Nifty, has formed a Bearish Engulfing candle on the weekly time frame. This long upper shadow, engulfing the bar at the prior swing high, has given a strong warning signal to the bulls. It registered a failed breakout by closing below the slopping trend line drawn from October 2021 highs. It also closed below the last 8th September's gap area. Importantly, on a line chart, the Nifty has broken the double top pattern on the weekly chart, along with RSI also broke the same pattern. This is the more valid breakdown. The 19-day consolidation given breakdown signs by closing below the prior bar low and confirming the previous day's dark cloud cover's implications.

With the last two days of decline, the 20DMA entered into a downtrend, which is a short-term negative. The 34EMA stands as support for now. A decline below this may test the 50DMA. The 50DMA support is just 1.98 per cent away at 17190. This is almost equal to the consolidation low of 17,166 on August 29. Currently, the long-term average 200DMA is at 16981, is 3.24 per cent away. For next week, the first level of support is at 17408, which is a 23.6 per cent retracement level of the prior uptrend. A break below this, there is another very strong and crucial support is at the 17166-190 zone, which is very crucial for outperformance. In any case, a close below this zone will have serious bearish implications.

On the indicators front, the RSI declined below the prior low and below the 50 zone. This shows the strength of the trend has weakened. The MACD and TSI have given a fresh sell signal. For the first time after July, the -DMI moved above the +DMI, and ADX is an indication of the domination of the bears. The KST line is declining since the 19th August swing high. This divergence is negative for the index. The Elder impulse system has formed a strong bearish bar.

Apart from all these technical factors, the Federal Reserve meeting next week is expected to hike the interest rates by another 75 basis points to contain the inflationary pressure. The measure will shake the equity markets once again. Meanwhile, the Dollar Index (DXY) is still high at $109.64, although it has been consolidating for the last two weeks. These two fundamental factors will have a solid impact on the market next week. The domestic equity market has become more stock specific. The Mid and Small-cap space is looking great, as many stocks are breaking out of bases. Look for high Relative Strength stocks and Stage-1 bases near the breakout. Next week is going to be highly volatile; cut down your exposure to leveraged positions.

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