Better to avoid fresh purchases

The market snapped a five-day rally and declined sharply. The frontline index, Nifty, sharply lower by 208.30 points or 1.23 per cent and closed at 16663. The Metals dragged the market by a declining 4.07 per cent. IT, Media, Energy, and the Commodities sector indices declined over two per cent. The Auto and the FMCG indices are up by 0.57 per cent and 0.17 per cent, respectively. The VIX rose by 4.10 per cent. The market breadth turned negative again as 1462 stocks declined, and 608 stocks advanced. About 40 stocks hit a new 52-week high, and 122 stocks traded in the upper circuit. Tata Motors, ICICI Bank and Reliance are the top trading counters.

Our suspicion about the rally on low volume and negative market breadth proved right. The Nifty declined below the 20DMA and formed a dark cloud cover candle. It also formed an outside bar. After a positive opening, the Nifty sharply declined in the afternoon session. Today's decline with higher volumes indicates that the market has made a short-term swing high at 16929. As long as the index trades below the level is negative for the market. In the derivatives segment, the Open Interest also rose by 4.98 per cent, indicating fresh short positions build up. Some of the momentum indicators are already in the overbought condition. All sectors participated in the fall today, and the Metals lost their relative outperformance.

On a 75 minutes chart, the RSI closed below the prior swing low and confirmed the previous day's hidden divergence's bearish implications. Even the MACD also gave the fresh sell signal. At the same time, the outside bar is a reversal sign. The index also closed below the 200EMA, and the 8EMA worked as support. A close below 16577 will confirm the resumption of a prior downtrend. The upside swing was also sustained for only five days in the current fall. As expected, the Nifty tested the breakdown level and closed below the 16840 once again. It escaped the formation of a bearish engulfing pattern. Over the market structure once again weakened. Better be on the sidelines with cash in hand. The current condition is not conducive for fresh purchases.

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