Nifty's trend indicators signal long-term bearishness

The Nifty moved downwards on high volatility in the last four trading sessions. It declined by 573.45 points or 3.33 per cent and broke the counter trend consolidation. As we mentioned in the last week's report, the Nifty has tested almost 61.8 per cent retracement level (16604) support. During this period, the declines were sharper. With the RBI's surprise interim monetary policy, the markets across the sectors fell sharply on Wednesday. The recovery effort from the lower levels on Monday did not sustain. The 50 DMA acted as resistance for two days. After a 2.3 per cent fall on Wednesday, the Nifty is forming an inside bar and does not have any trend change implications. But, as it closed near to the previous day's low, a breakdown below 16604-23 will further strengthen the bears. The pennant breakdown target is placed at 16087-124 zone of support. This is almost the downward channel support.

Currently, the Nifty is holding eight distribution days and trading below the 50 and 200 DMAs, which is a long-term bearish indication. At the same time, the 50 DMA is below the 200 DMA, and a Death Cross' is also a bearish sign. The distance between these two trend indicators is widening. Unless the index decisively closes above the 50 DMA (17078), the trend remains on the downside. The 200 DMA (17242) will act as another resistance.

As the index witnessed a strong down move, a short-term bounce is a possibility. During this bounce, Nifty has to cross the first 50 DMA and then the 17193 - 17242 strong resistance zone. The market breadth is extremely negative, and none of the sectors is in a position to lead or support the market. About 70 per cent of the Nifty stocks are below the 200 DMA, and 57 per cent of the stocks are below 50 DMA. This negative bias is another indicator of the weaker market. It is better to protect the capital in current market conditions. Staying sidelines is a better strategy than taking risks in a volatile market. One should wait for market conditions to improve and avoid catching a falling knife.

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