Early signs of counter-trend consolidation

The domestic equity market traded in a narrow range during the last week. It traded between 17,354-17,436, a 182 points range and finally settled with just 45.65 points or a 0.26 per cent gain on a weekly basis. BSE Sensex also closed up by 0.3 per cent. The Nifty Midcap-100 and Smallcap-100 indices advanced by 0.9 per cent and 2.3 per cent, respectively.

The Nifty Media index is the top gainer by 3.8 per cent, followed by Nifty Energy, Metal, FMCG, and Fin Service, which closed 0.2–1.0 per cent higher. On the downside, Nifty Pharma declined by 1.1 per cent. Overall, market breadth has been almost 1:1 during the last week. In the last seven trading sessions this month, FIIs bought Rs669.88 crore, and DIIs bought Rs877.98 crore worth of equities.

The market moved as expected last week; the NSE Nifty moved in a very range and entering into another consolidation phase. It closed above the previous week's high, but the range is limited to one-third of the previous week. This narrow range is because of overbought market conditions and an impulsive move after the breakout. Next week, the small Doji candle has bearish implications only if the Nifty close below the 17,254 points. There is a sign of bearishness in any time frame. The concern is the hesitation of going further highs. As I mentioned last, September is generally a subdued month as the market moved in a range most of the time in history. But don't expect the market to decline sharply. Even in September 2001, the Nifty formed a bottom.

The Nifty exactly extended 100 per cent equal to the April-June swing. Generally, after 100 per cent of extension, the market or a stock consolidated for some time and resumed or reversed the trend. The initial upward channel target is at 17,746 points, and the 161.8 per cent extension target is 18,345 points. We may reach these targets in the October-December quarter. Before these targets, the question is, what is the counter-trend consolidation range?

The calculation is simple. From July 28 low of 15,513 points, the NSE Nifty scaled a new high of 17,436 points. This 1,932 points rally in just 28 sessions is impulsive in nature. There are two small bases during this impulsive move. Now, for the last three days, the index has been forming lower lows. This is an early indication of counter-trend consolidation. The 23.6 retracement level of the 1,932 points rally is 16,982 points. So, expect just a 2.7 per cent correction from the last week's top. This correction is not a big one, but, the stock-specific action will hurt the portfolio accounts. This corrective consolidation may be limited to another three to four weeks only.

With the expected correction, the indicators will also come out of overbought conditions. Reasonable consolidation may occur. A correction in the range of 3-5 per cent is healthy for the bullish market. Use September base as a buying opportunity for short-term gains.

The Caution here is, historically, the market tops formed in January - March quarter. 16 out of 21 years, the market tops happened in this quarter. And out of these 16 tops, the nine tops were made in the month of January, including the recent January 2020 top. Accept this historical fact. History repeats again and again, and again.

(The author is financialjournalist, technical analyst, family fund manager)