Charts Signal Decisive Downtrend

In the last truncated week, NSE Nifty closed lower in all trading sessions. The Nifty declined by 4.45 per cent, and the BSE Sensex is down by 4.54 per cent. The Midcap and Smallcap indices also declined by 3.16 per cent and 2.51 per cent, respectively. Only the Nifty Metal index is able to close with a 0.48 per cent gain. All other sectoral indices closed negatively. The Realty index is the top loser with 7.69 per cent, followed by the Auto index with 6.10 per cent. The market breadth is negative for the week. The India VIX is up by 18.10 per cent to 14.12. The FIIs sold Rs30,719.57 crore worth of equities in just three days. The DIIs bought Rs26,428.59 crore.

The benchmark index, Nifty, corrected 4.99 per cent from its top last week. This is the biggest correction after Sep-Oct 2023’s 6.85 correction. The difference is that it took six weeks to correct 6.85 per cent last time, but this time, it is in just a week. In both cases, the RSI has developed a negative divergence prior to the fall. Importantly, the index has met all its pattern targets and extension targets. It extended 100 per cent of the March 2020 -October 2021 swing. The Nifty is reacting from a 100 per cent level of 26276 (Reached a high of 26,277.35). Now, the question is where the correction ends.

The Category-1 correction (10-13%) has been due for a long time. Since the 2020 low, there have been only two Category-1 corrections. It has already corrected 4.99 per cent. The remaining correction has the highest probability, as several negative factors are coming in.

The reasons for probable correction look more valid. The fund outflow from the domestic market is very severe. The FIIs sold over Rs30,000 crore in just three days. These funds flowing into the Chinese markets are the first reason. The second reason is Geopolitical tension in West Asia. Third, the recent Sebi circular on changes in the derivatives segment may impact the trading volumes and participation in a greater manner.

Apart from these factors, there is a strong technical reason for the correction, which we have been mentioning for the past few weeks. The Nifty deviated from its mean and was far away from the averages. At one point, it was almost 15.96 per cent above the 50-week average. Now, the index declined below the 10-week average after May 2024 and is still 10.26 per cent above the 50-week average. The 100DMA acted as support in the previous corrections and is now 3.07 per cent away, which is the nearest strong support, at 24,270 points. It is 7.6 per cent for the top. The 10 per cent correction is exactly equal to the 23.6 per cent retracement of the July 2022 - Sept 2024 major swing, which is at 23,659 points. Expect this level to test in the next 3-5 months period.

The monthly RSI has been in the extreme zone, above 80 for the last three months, finally coming down to 77.91 with last week’s correction. This may test the 60 zone if the projected correction is a reality. The weekly RSI is on the 60 support. The weekly ADX is declining for the past five months and shows weakening trend strength. The Weekly MACD is about to give a fresh bearish signal. The Nifty closed below the 50DMA and has four distribution days. If it declines further with additional distribution days, the index will enter a decisive downtrend.

The RRG chart shows that all the sectoral indices lost momentum in whichever quadrant they were in. The Consumer Durables index improved momentum and Relative Strength in the leading quadrant. The Metal index is near high, improving momentum. The IT index is also near high, but has lost momentum in the leading quadrant. Earnings will decide the future direction. Pharma and healthcare are also in the leading quadrant but have lost momentum. All other sectors are not in good shape.

In a nutshell, the index has to protect the 25,000 psychological level and is crucial to watch. Below the nearest support is the prior swing low of 24,816. Below this, the index will test 24,498 points, which is a 20-week average. It is better to book profits full or partial wherever possible. The earnings momentum is crucial for further upside. Watch the earnings growth before taking a position. Avoid leveraged positions.

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