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Nifty in oversold zone

Benchmark index forms a big bearish Engulfing candle on a weekly chart; It closed at the previous week’s low and erased all the gains in the last 3 weeks; Expect more surprising swings

Nifty in oversold zone

Neutral market breadth

  • 1,253 advances
  • 1,288 declines
  • 105 stocks hit a new 52-wk high
  • 110 stocks in upper circuit

The equities continued to decline for the third consecutive day. The recovery in the Pharma and PSU Banks’ stock limited the fall. NSE Nifty declined by 109.70 points or 0.51 per cent and closed at 21,462.25 points. Nifty Pharma is the top gainer with 1.03 per cent. PSU Bank index gained by 0.81 per cent. Realty, Auto, and Infra indices also closed in the positive territory. FinNifty is the top loser with one per cent. All other sectoral indices declined by 0.3 per cent to one per cent. The India VIX is declined by 6.7 per cent to 14.07. The market breadth is 1:1 as 1,253 advances and 1,288 declines. About 105 stocks hit a new 52-week high and 110 stocks traded in the upper circuit. HDFC Bank, IRFC, OFSS and RVNL were the top trading counters in terms of value.

The Nifty has been trading in an 838.6 points range since the last weekly expiry. The last three days of fall, after hitting a new high, indicate a massive distribution. The HDFC Bank earnings spoiled the market mood. The Nifty has declined by 3.79 per cent from the all-time high. The fall was led by the heavyweight sector index, Banknifty, with a decline of 5.86 per cent in the last three days.

The Nifty has formed a big bearish engulfing candle on a weekly chart. It closed at the previous week’s low and erased all the gains in the last three weeks of gains. Previously, the majority of the topping formations were bearish engulfing candles. The historical fact is that January has been the most bearish month in the last 20 years. If the fall extends next week and closes negative, we can expect that the market will enter decisively into the counter consolidation. Testing of the 10-week average is imminent if the bearish engulfing gets a confirmation next week.

Most importantly, the index extended the losses beyond two days after October 26. This is a sign of weakness. As the fall is sharp, it tries to pull back towards the 20DMA of 21,613 points, which is also almost 38.2 per cent retracement level of the last three-day fall. The weekly volumes are higher in the last five weeks, indicating the distribution. If the Nifty extends the fall for another day and tests the 21,170 points, it means our target for the short term is achieved.

Expect a short covering next week as the monthly expiry is scheduled. At the same time, the index is in the oversold condition on an hourly time frame. The pullback is common after a sharp decline, and it has already recovered over 176 points from the day’s low. It also retested the flat base breakdown level. In a nutshell, the downside move is limited for this weekend. On the upside, it may try to close around the 21,600-625 zone. The volatile moves are common and expect more surprising swings.

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

T Brahmachary
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