Nifty May Enter Consolidation Phase

The equities erased the opening gains as the geopolitical tensions escalated along the Indo-Pak border. NSE Nifty managed to close above 24,000, with a 0.79 per cent gain. BSE Sensex is up by 0.84 per cent. The Broader market indices Mid-cap and Small-cap indices gained by 1.73 per cent and 0.83 per cent, respectively. The Nifty IT index is the top gainer with 6.56 per cent. The Auto and Realty indices advanced by 2.91 per cent and 1.69 per cent. On the flipside, the Media is down by 2.11 per cent, and the Consumer Durables index slips by 0.80 per cent. The India VIX is up by 10.93 per cent to 17.16. The FIIs continued to buy the equities. They bought Rs17,796.39 crore worth of equities last week. The DIIs bought Rs.1,131.81 crore last week.

The Nifty has formed a Shooting Star candle on a weekly time frame and closed on the 50-week average support. It began the week on a strong note and reclaimed the 200 DMA. However, at the end of the week, the index is just below the 200 DMA, which is at 24,050. It recorded the highest volume after the first week of June, even on the rupee terms. Now, all the short-term averages are in the uptrend. The Nifty is now 4.37 per cent above the 50DMA.

Since the impulse began, volumes have been recording above the average, which is an indication of accumulation after a 17 per cent correction in the index. Though the last four days of price action have been wavering and bearish, the index has yet to get confirmation of a reversal. In any case, if the Nifty closes below the 50-week average of 23925 or 23847, it will get a decisive bearish confirmation.

The Nifty has filled the last Monday gap area, closed below Wednesday’s low, and confirmed the inside bars’ downside implications. The index took support at the 8 EMA and bounced in the afternoon session. The broader market selling pressure was visible as all sectoral indices were negative. Only the IT index is able to outperform compared to the other sectors.

The negative divergence in RSI is clearly formed now. In any case, closing below 60 will result in further weakness in the market. As mentioned above a close below 23295-847 will be negative, and it can test the next support of 23360. Below this, the Nifty may test 23051, which has higher probability. On the upside, a close above 24365 is needed to resume the uptrend. As the market is nervous at higher levels, and with a clear bearish signal.

For the next two months, the consolidation is imminent. The consolidation range will be 21743-24365, or the last three weeks’ range. After the completion of a bear market retracement, the move is impulsive by at least 50 per cent of the prior, which has already been done. Now it is time for correction. With high probability, the Nifty may form an ending triangle with two downswings and two upswings.

During the consolidation period, high-quality and large-cap stocks will outperform the broader market. BFSI, Metal, Consumption, and Commodities stocks will outperform compared to the Nifty-500 index. Focus on the stocks with 20 per cent earnings growth and low beta stocks for the next two months.

(The author is partner, Wealocity Analytics, Sebi-registered research analyst, chief mentor, Indus School of Technical Analysis, financial journalist, technical analyst and trainer)