Wait for reversal signal amid lack of signals

The domestic equity indices recorded one of the best gaining weeks in recent history. The benchmark index Nifty gained by 953.20 points or 4.26 per cent, which is the maximum gained after February 2021. BSE Sensex advanced by 4.17 per cent. The Midcap-100 and Smallcap-100 gained by 7.74 per cent and 8.64 per cent, respectively. The Microcap-250 index is up by 7.91 per cent. With this, the beaten-down broader market recovered sharply this week. On the sectoral front, all sectoral indices closed positive. The Realty is up by 7.82 per cent; Media is up by 7.64 per cent. The Energy and Pharma indices advanced by 6.33 per cent and 6.08 per cent. The market breadth is extremely positive during the week. The India VIX collapsed to 12.52. The FIIs bought aggressively Rs7,470.36 crore on Friday. But they sold Rs15,412.13 crore in this month. The DIIs bought Rs30,788.19 crore worth of equities this month. The Nifty rallied 945.15 points or 4.21 per cent, during the last five trading sessions and recorded its most significant gains since July 2022. It formed a strong bullish bar and closed above the 10-week average. The volumes were higher than the previous week and above the average. This shows a strong pullback. The Mid, Small, and Microcap indices gained 7.6 per cent to 8.6 per cent, which is the highest in recent history. The Bank Nifty closed at the pivot of a Double-Bottom pattern. The Nifty tested the 78.6 per cent retracement level today and reacted.

On an hourly chart, the index has been in an extremely over-bought condition for the last two days. This may result in a significant profit booking. In any case, the index close below the prior day’s low will be negative. As long as it makes higher lows, be with a positive bias. Today’s volume is massive, and most of the volume was recorded in the last 90 minutes. The Bollinger bands began to expand as we expected earlier. The Nifty is now 1.66 per cent above the 50DMA. The prior high is just 1.70 per cent away. If the index closes above 23,808 points, it will form a higher high, which is a trend reversal sign. The 23,063-23,133 zone will act as a crucial support zone. If the index closes below this zone, expect another decent correction.

The question is, after this 6.55 per cent rally from the recent low, is it a sign of the correction ending? or will it extend to the 4th June low? The basic principle is that, after a big correction, the price generally forms a base. Only during the 2020 crash, the market has registered a V-shaped recovery. Now, the Friday high of the 23,403-23,461 zone will be a crucial resistance. Expect a decent correction. The higher probability is that the Nifty may form a lower high or a parallel high (low probability) and begin the downside move. Here, the question is, will it form a higher low or a lower low? If the higher low forms, expect the correction to end, and the next leg of moves extends beyond 23,808 and enters into Stage-2. In any case, the Nifty declines below the recent low of 21,964, expect the correction will continue and test the 21,280 and complete the 18 per cent correction. For now, it is not wise to forecast more than this. This correction may end in mid-May. We need to watch the price behaviour around the 21,180-21,280 zone for future action.

The RRG charts show that the Metal, FinNifty, Private Bank, and Bank Nifty are in the leading quadrant and may outperform in the near term compared to the Nifty-500. The Oil and Gas, Auto, FMCG and PSU Bank index are in the Improving quadrant and may try to enter the leading quadrant. They will do better but need to improve their relative strength. The other sector indices are losing their momentum and relative strength, and it is better to avoid them.

In a nutshell, the Nifty may form a swing high in the next one or two days around the 23,400-23,500 zone. The next leg of the downswing will be sharp. The index may continue to decline for at least eight days. Wait for a reversal signal, like a close below the prior day’s low. It is better to avoid fresh, long positions.

(The author is partner, Wealocity Analytics, Sebi-registered research analyst, chief mentor, Indus School of Technical Analysis, financial journalist, technical analyst and trainer)