Nifty sends several bearish signals

The markets closed sharply during the last week. All the four days benchmark indices were with losses. The intensified selling pressure occurred just a week before the Union Budget. The Nifty lost 775.15 points or 5.4 per cent during the last week. The BSE Sensex also corrected by 5.3 per cent.

The Broader market indices Nifty Midcap-100 and Smallcap-100 down by 3.5 per cent and 2.3 per cent respectively. All the sectoral indices fell sharply. The Nifty IT declined by 6.9 per cent, and the Auto index fell by 6.7 per cent. FIIs were continuously selling for the past five days. This their long selling streak after in the last six months.

They sold Rs.12,732.38 crore worth of shares in the last five days. DIIs started buying after a long selling streak. They bought Rs.4179.2 crore worth of shares in the last two days. The market breadth is extremely negative during the last week.

The benchmark index, the Nifty, lost 7.8 per cent from its lifetime high of 14754 on 21st January 2021. This is the highest fall points-wise and third-largest fall on percentage-wise since the March low. A fall above 10 per cent categorised as a correction. Now with the last six days of fall, the Nifty is giving many bearish signals. It closed below the 50DMA.

The current distribution day count is five, which is higher. As it declined almost 8 per cent from its recent top and at a doorstep of a deeper correction. The overall market breadth is extremely negative. The prior swing low and the trend line support is at 13131. The 100EMA is placed at 12995.

These are the important levels for next week for the market to be in the uptrend. In any case, it closes below 13131 decisively next week, the trend classified as a down trend as it makes a new lower major swing low. Interestingly, the 23.6 per cent retracement of March 2020 - January 2021 upswing is at 13044.

The 12995-13131 zone is a confluence of support levels. The market may test these levels next week as long as it trades below the 13967. Interestingly, the trend line drawn by connecting the previous tops of September 2018, June 2019 and January 2020, is now may act as a support, which is at a similar level around 13000.

Another interesting historical is that every time the Nifty doubled from the lows, it corrected 25 per cent to 40 per cent in the last decade. The Nifty double from its October 2008 low of 2252 to 5690 in November 2010. Since then it corrected 28. 5 per cent by December 2011 to 4531. Again from here, it doubled by March 2015 to 8269. Then corrected 25 per cent by February 2016.

Then, almost double from here to 12430 on January 2020. Then corrected 40 per cent. Since March 2020 lows it again rose by 96 per cent. As the basics of technical analysis, say, the history repeats, so this time expect a correction of above 25 per cent.

That means it is going to test the September 2020 low of 10800 levels. This is also 55 per cent retracement level of the current uptrend. As long as, the Nifty does not close above the prior week's high, this correction possible.

It is too early to call a bearish market. But the limitations on upside fundamentally and technically are visible. Even the budget has a limitation on the fiscal side and public spending. As I keep mentioning since the Nifty PE had reached above 30 levels. By the time the correction mentioned above of 10800, the PE levels also will reach to a reasonable level.

(The author is a financial journalist and technical analyst. He can be reached at [email protected])