Counter-trend consolidation likely

• Nifty still 7.53% above 20-wk average

• 50-wk average is 2,472 points away

• The distance between mean average and the index increases

• Possibility of mean reversion

The benchmark index Nifty breaks the seven-week winning streak as the index traded in the 616.20 points range in a choppy trading week. Finally, it declined by 107.25 points or 0.50 per cent last week. BSE Sensex also declined by half a per cent. The broader market indices, Nifty Midcap and Smallcap, are also down by 1.1 per cent and 0.3 per cent, respectively. Nifty FMCG and Pharma outperformed by 1.7 per cent and 1.2 per cent, respectively. The Nifty Auto, Bank Nifty and FinNifty closed lower by 1.4 per cent and 1.6 per cent. The FIIs sold Rs6,422.24 crore, and the DIIs bought Rs9,093.99 crore worth of equities last week. The India VIX rose by 4.42 per cent to 13.71 per cent.

Our suspicion about the unabated, seven-week vertical rally finally halted, and the expected pause has become a reality. The Nifty closed with a tiny half a per cent loss, but on a highly volatile week. The Nifty has formed a Hanging Man candle, which is an indication of exhaustion. The index is still 7.53 per cent above the 20-week average, and the 50-week average is 2472 points away. The distance between the mean average and the index increases, and there is a possibility of mean reversion. A reasonable correction or a counter-trend consolidation is desirable. Generally, any steep rally will retrace at least 38.2 per cent retracement level, which is currently at 20,540 points. If the profit booking continues, it may extend to a 50 per cent retracement level, which is at 20215. We cannot forecast more than these levels.

As the monthly derivatives expiry is on the cards, the volatility will increase in the last three days of the series. The index futures gained by 1,269 points or 6.30 per cent during this December series. Normally, the FIIs rejig their portfolios this month. This may lead to an adjustment in the Nifty. Historically, the January-March quarter is bearish. At least 16 tops were made in this quarter in the last 20 years. So expect the counter-trend consolidation to extend till the next three months. At the same time, before the general elections, markets are normally subdued. Expect a consolidation breakout in April, before the election results, as the market discounts the outcome early.

During the next three, some of the large-caps will outperform and lead the index to enter the bear market. As stated in the previous column, the 18,600-880 zone is the new base for the market. Do not expect this will breach. The underperforming large-cap stocks in the Nifty-50, like Reliance, HDFC Bank, Wipro, Bajaj Twins, and ITC, will outperform from now on. At least 40 per cent of the Nifty stocks have the potential to outperform from now on. These stocks are the major drivers to achieve the 26,000 target by 2025.

The Nifty may trade in the last week’s range of 20,976-21,593 for the next week. Expect the profit booking in the small- and mid-cap stocks, as they rallied more than the benchmark. The IT, Energy, and FMCG stocks will outperform. Now onwards, every upside move must be used to book and protect the profits. It is advised to be highly cautious for the next four sessions.

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