Avoid taking fresh positions now

Covid's new variant fears gripped the world markets and massacred the equity benchmarks across the globe. The bears tighten the grip on the equity markets worldwide, as the new variant looks dangerous. Many countries have already initiated travel restrictions and are expected to be coming soon. WTO postponed its ministerial conference. The Indian Government also reviewed the situation closely to be cautious about imposing new curbs. With the Global market meltdown, the domestic markets are also nosedived after a gap down opening. It registered one of the biggest falls in the last eighteen months as down by 509.80 on Friday. During the last week, the Nifty declined by 744 points or 4.18 per cent and settled at just above 17000 levels.

Barring Pharma (+2.3 per cent), all the sectoral indices are down by 3-5 per cent. The Nifty Auto was the top loser with 8.4 per cent. The Broader indices Nifty Midcap-100 declined by 4.2 per cent, and Smallcap100 down by 4.3 per cent. The volatility index VIX is up by 24.85 per cent on Friday alone and closed above the 20 levels after a long time. The market breadth is extremely negative during the week. The selling pressure from the FIIs intensified as they already sold over Rs.31,124.46 during the current month, which is the highest this year. Earlier, they sold Rs.25,572 crores in October and Rs.23,193 crores in July.

The Nifty registered the biggest fall after April 12 and formed a big bearish body candle on a monthly chart. On every time frame formed serious bearish candles. The current week's 744 points weekly fall is the sharpest fall after January this year. A monthly chart formed a bearish engulfing and confirmed the previous months' shooting star candle's bearish implications. It also closed below the September low, or two months low. Interestingly, the 100-day moving average is violated, and the 50DMA is begun its downtrend. As we cautioned earlier, the Head And Shoulders target is almost met. Even after this big fall, the Nifty corrected only 8.7 per cent or 1618 points from the recent top. Earlier, during February-April, the correction was limited to 8.3 per cent. Any correction above 10 per cent is categorised as a clear downtrend. Importantly, the benchmark index decisively closes below the downward channel support, too, and it retraced 50 per cent of the rally from the 28th July low. In any case, it fails to move above 17600, and the next support is at 16694, which is a 61.8 per cent retracement level, which beliefs to be a very strong support zone. The Nifty entered into a near oversold zone as the RSI reached 31.24. The weekly RSI is below the April swing low. This is a clear sign that strength is weakening in the market. The index closed much below the lower Bollinger band, and there is a possibility of bouncing back into the bands. Any recovery in market sentiment may lead to a technical bounce towards 17250.

The broader market suddenly, in the bear grip. As many as 16 stocks in the Nifty 50 closed below their 200DMA last week. The Nifty-500, which represents 95 per cent of the market capitalisation, just holds the 100DMA support. Importantly, across sectoral indices, the relative performance is declining. The missing leadership of the leading and defense sector is the present and clear danger for the market direction. The strong and leading sectors like IT, Metals, and Pharma sectors are nowhere near the leading quadrant. As the Nifty breached the long rising trendline support drawn from the March 2020 lows, it shows that the 18-month long trend is matured and signalled the reversal. The Weekly MACD also has given a fresh sell signal.

As the market is in clear intermediate downtrend, avoid new purchases now. Trim down the portfolio in every bounce. The daily trading ranges may increase from next week onwards as VIX is already above the 20 level. The Dow Jones and the S&P 500 indices declined below their weekly supports and below the minor swing lows. European markets are worst hit by renewed fears of Covid-19.

With the above evidence, the outlook is very negative, and any bounce towards the 17200-300 range will be an opportunity to trim down the portfolio. The 200 DMA is the key support for the near term. Along with the 61.8 per cent retracement level, it could act as a support for now. Any untoward global negative news may dampen the sentiments and will breach this supports also.

(The author is a financial journalist and technical analyst)