Mkt hovering in consolidation phase

Volatile moves in the VIX are hinting caution about the direction. Last week, the VIX was up by 20% and broken out of a 17-week range

The benchmark indices traded in a range with high volatility. NSE Nifty traded in a 274.55 points range and finally closed with just 35.90 points or 0.18 per cent decline. It gained by 384.50 points or two per cent in the September month. BSE Sensex was down by 0.27 per cent. The broader market indices, Nifty Mid-cap and Small-cap indices, outperformed by 0.99 per cent and 2.18 per cent gains. On the sectoral front, the Nifty Realty and Pharma indices were the top gainers with 2.52 per cent and 2.35 per cent, respectively. The Nifty IT and Media indices are down by 3.41 per cent and 1.04 per cent, respectively. The FIIs sold Rs26,692.16 crore, and the DIIs bought Rs20,312.65 crore worth of equities in September month. The Advance-Decline ratio is almost neutral at 0.93.

The Nifty broke key support last week. It formed a long-legged small body candle on a weekly chart. After testing moved below the 10-week average and 50DMA, the index closed below last week’s low. In last week’s columns, we mentioned the mean reversion and impact of the low VIX regime. The mean reversion is real now, as the index trades around 20 and 50-DMAs. The Bollinger bands began to contract last week.

The volatile moves in the VIX are hinting caution about the direction. Last week, the VIX was up by 20 per cent and broken out of a 17-week range. It also broke out of a downward-sloping channel. Soon after the monthly expiry, it collapsed by 10.68 per cent, which means it retested the breakout. Finally, on a net basis, it was up by 7.43 per cent last week. If the India VIX moves above the 13-15 zone, we will see more sharp declines.

Last Thursday, The index moved in the 274.55 points range and declined by 193 points with an above-average volume. On the next day, it traded in 175.2 points range. Finally, it closed below the 50 per cent retracement level of the day’s move and the previous day’s range. These huge swings combined with volatility in the VIX index. These moves are the results of the previous three-week higher degree rise.

The Nifty is now trading just 0.06 per cent above the 50DMA and 0.75 per cent below the 20DMA. It faced resistance at 8EMA. The RSI took support at the near 40 zone and bounced on the last trading day. It will be most bearish if the RSI declines below the 40 zone and the MACD line below zero. The trend strength indicator ADX has also declined, indicating the bulls are losing control. The RSI has developed a positive divergence on a lower time frame chart, which may result in a pullback.

Only in case a bounce above the 20DMA of 19,761 is positive. The 38.2 per cent retracement level is also at a similar level of 19,771 points. Above this immediate resistance, the target is at 19,943 points. But, in any case, the Nifty declines below 19,585-50 will be negative. A decisive close below Thursday’s low of 19,492 will lead to a test of the previous low of 19,223 points. Before this, the 19,380 will act as a crucial support. In other words, the 19,380-19,771 zone is crucial for the short-term perspective. The market may consolidate within this for at least one week.

On the RRG charts, all the sectoral indices lost their momentum except PSU Banks. The Nifty Metal, Pharma Media, and Consumer Durable indices were in the leading quadrant, but lost momentum. The Oil and Gas, Bank Nifty, and FMCG indices were in the lagging quadrant. The Auto and Realty indices were in the weakening quadrant. The Nifty IT index only shows some strength in Relative Strength and Momentum.

Overall, the market may witness volatile sessions from now on. Stock-specific activity will continue. Most of the index heavyweight stocks formed bearish patterns. Stay with a cautious approach.

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