Correction more likely ahead of elections

The Federal Reserve’s policy influenced the domestic equity market last week. The benchmark index Nifty was up by 73.40 per cent or 0.33 per cent last week. BSE Sensex advanced by 0.26 per cent. The Midcap-100 and Smallcap-100 indices outperformed by 1.34 per cent and 1.41 per cent, respectively. On the sectoral front, Nifty Realty is the top gainer with 5.34 per cent, followed by Auto with 4.23 per cent, and Metal with 4.21 per cent. On the flipside, Nifty was the top loser with 6.17 per cent, followed by FMCG with 0.70 per cent. For the first three days, the market breadth is extremely negative. The India VIX is down by 10.74 per cent to 12.22, the lowest close after December 13. The FIIs bought Rs945.71 this month, and DIIs bought Rs47,398.11 crore of equities.

The Nifty oscillated around the 50DMA the whole week. After spending two days below the 50DMA, it reclaimed in the last two weeks. The 10-week average acted as major support six times in the last nine weeks. Last week’s bearish engulfing candle failed to get confirmation of its implications. On a monthly chart, the Nifty is forming a long-legged Doji candle. There are only three trading sessions left in this month. The index must close above the 22,127-22,300 zone to avoid the bearish signal. In any case, if it forms a Doji candle, it will be the second in three months. The January month’s Doji candle failed to get a confirmation for its bearish implications. In this scenario, the decline in the benchmark index must extend at least three weeks or more. Importantly, it must close below the 10-week average. Otherwise, all corrections can be considered just a retracement of ongoing trends.

Let us watch for the March monthly closing to get clarity on the January-March topping cycle. The April month must form an engulfing or lower-high, lower-low candle. Since March 2020, only one correction has extended more than 18 per cent. All other corrections were limited to 4-10 percent. From the June low, followed by a major correction, the recent lifetime high was formed after 21 months, which is the Fibonacci number. The Fibonacci numbers significantly impact the monthly chart in identifying major tops. If we assume that 22,526.60 is the intermediate top, expect a correction towards 21,137 points, which is the prior major low and just a 10 per cent correction level from the all-time high. If the index ignores the Fibonacci effect and continues the rally, expect the index to test 23,155 by July-August. We can’t project more than this the moment.

From the Covid-crash low, the Nifty rallied by 199.91 per cent. This is the most impulsive gain in the shortest period. In the last decade, since the 2014, the ascending triangle breakout, the index rallied over 340 per cent, from 6,500 to 22,500. After this massive rally, the index looks near an extremely overbought zone and shows signs of exhaustion in the trend; it is forming more indecisive candles. A clear negative divergence in RSI on the weekly chart shows that the market may witness some adjustments before or after the General election outcome. And the weekly MACD has given a fresh bearish signal. The five-year cycle, which begins with an election year, means a new government formation; the Nifty has given positive returns, even after 2008 and 2020 crashes.

After an over nine per cent decline, the broader indices recovered less than 1.5 per cent and closed above the 38.2 per cent retracement level of the prior fall. Domestic inflows supported this move. Last week, the FIIs sold Rs8,365.53 crore. The Midcap-100 and Smallcap-100 indices formed rounding tops and bounced from the oversold condition. We need to watch whether this pullback can extend beyond their 10-week average.

The 21,900-22,215 zone is crucial for the next three sessions. There is a higher probability of trading within this zone. A close above this will face the resistance at 22,352 points, and a close below 21,900 will resume the downside move. The year-end adjustment to maintain the NAVs will continue and result in highly volatile movement. For the near term, stay focused on the stocks with high relative strength and earnings momentum. Position size and risk management are the key now.

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