Nifty may trade in 17565-18200 zone amid rising volatility

The fresh fears of Covid and the recession apprehensions gripped the equity markets worldwide. The domestic benchmark indices nosedived last week. NSE Nifty registered one of the biggest falls in recent times. It declined by 462.20 points or 2.53 per cent after 693 points wide trading range. BSE Sensex also declined by 2.4 per cent. The broader market indices experienced the worst fall as the Nifty Midcap-100 declined by 5.8 per cent and the Smallcap-100 down by 8.3 per cent. Only the Nifty Pharma index was able to close with 1.2 per cent gains. The recent outperformance of the PSU Bank ended with a 10.3 per cent decline. The Media index is down by 8.9 per cent. All other sector indices declined. The market breadth and the advance-decline ratio were very negative last week. FIIs sold Rs8,469.53 crore, and the DIIs bought Rs19,096.68 crore worth of equities this month.

The Nifty has registered one of the biggest and sharp falls in recent history. It has broken the rising wedge pattern with added distribution day. For all practical purposes, the breakout, which made a lifetime high, failed. The index holds six distribution days and is trading below the 50DMA. It closed below the support and resistances and formed a lower low. These are the characteristics of a downtrend. With all the above evidence, the Nifty is in a confirmed downtrend. It also closed below the 100DMA, which acted as support on September 30. It filled the 31st October gap area.

After the Head and Shoulder breakdown on December 16, It retested the neckline for the following three days. The pattern target was met in just six days, which is almost one-fourth of the pattern formation time. Importantly, for the last seven days, the Nifty is failed to close above the prior day's high. As it is already trading below the short and medium-term moving averages, the Nifty has to close above the prior day's high for a meaningful bounce. When the index moved higher from the 30th September low, there were several indecisive candles formed, and the daily ranges were very small. But, the current decline is with bigger daily bearish candles and with increased daily ranges. This shows the dominance of bears in the market.

The index is now 3.66 per cent above the 200DMA and 3.21 per cent above the 150DMA. These are the strong supports for now. Since June, there have been three down swings and two up swings. Each of the down swings is 13 and 21 days in length, and they are Fibonacci numbers. Importantly, the RSI is at a historical support zone of 28-32. The Nifty declined 5.87 per cent from the recent top. The previous decline is 7.45 per cent, and in June, it was 9.6 per cent. So let's watch for the current downswing that will honour the time or the price target. Here the rule is only a close above the previous day's high is the first sign of a pullback. Apart from this, a close above the 50DMA (18180) is crucial for the market to change its status to 'Rally Attempt'. At the same, it must not move below Friday's low of 17779. For the uptrend to resume, the index has to close above 18696, which is a swing high or a recent lower top. As mentioned earlier, the downside targets are open for 17565-580 if the failed move above the 18696. Will this target meet in straight sessions, or will it be after a bounce? We will get the answers next week.

Since December 1, when the Nifty hit a new lifetime high, the FIIs flow turned negative. The USDINR hit almost a new high. On October 19, USDINR closed at Rs83.008, and on a Thursday, the close was Rs82.96. It may not decline below Rs82.10. As I stated earlier, the target is Rs84 in the near term. The Dow index also declined by 5.7 per cent from its recent high. These are factors that may influence the markets.

The December monthly expiry is due next week. Volatility increased by 14.85 per cent last week and it came out of three weeks' consolidation. Expect to increase towards 18.5 to 20 levels in the coming days from the current level of 16.16. Next week, the Nifty may trade broadly between the 17565-18200 zone with increased volatility. Friday's gap area is crucial. Keep position size small, and apply prudent risk management.

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