Market still needs more striking moves to get bullish bias

The domestic equity markets ended on a strong note last week. Traded on a losing streak for the first three days, recovered sharply and erased all the losses. The benchmark index Nifty closed with 137.75 points or 0.85 per cent. BSE Sensex is up by one per cent. The broader indices, Nifty Midcap-100, which declined by 0.8 per cent, and the Smallcap-100, which also declined by 3.4 per cent, ended lower. Most of the sectoral indices were also in the red. The Nifty Metal index was the worst performer, with 8.67 per cent. The FinNifty and Bank Nifty are up by 4.32 per cent and 3.90 per cent, respectively. The Auto index is also up by 3.25 per cent. The Market breadth is mostly negative. After touching 26 levels, the India VIX went down by 7.01 per cent to 21.48. FIIs continued to sell the equities. They sold Rs.53,790.99 crores this month, which is the highest-selling level in a month. The DIIs bought Rs47,465.90 crore worth of equities during the month.

The last two days of price action have created a lot of hopes for a bullish reversal as it rallied 467 points from Thursday's low. But, it is still in the range of 15735-16404 range. As we discussed earlier, the bear market rallies are seductive in nature. As David Keller said, "Counter-trend rallies in bear markets can be usually described as sudden, severe and seductive." These rallies happen suddenly. The sudden, surprising rallies are punctuated by Hammer candles, Engulfing, the Base breakout, and the other bullish patterns. These counter-trends generally do not exceed 61.8 per cent retracements of the prior swing. Importantly, The Nifty closed above the 23.6 per cent retracement level. The Nifty has formed an ascending triangle on a daily chart. It formed a higher high and higher low candle on a weekly chart. This actually gives confidence to bulls.

The Nifty will register an 11-day ascending breakout if it closes above the 16410 with a higher volume. The pattern breakout targets are open to 17073, which is very near to the 61.8 per cent retracement level of 17205. Another five per cent rally in the index will take to this level. The index also closed above the 20 Day moving average for the first time after the 13th of April. As mentioned earlier, whenever the index moves beyond 6.4 per cent, it generally retraces back the average. As the Bollinger bands started narrowing down, expect some more positive days. This is exactly happening now. But, it is still in a downtrend. The 50 DMA is at 3.34 per cent away at 16918. The 200 DMA is 5.22 per cent away at 17253.

The RSI is currently at 48; a move above 50 will gives a bullish confirmation to the index. It came out of the oversold zone during the 11-day consolidation. The MACD line is also turning back from the oversold zone and crossing the signal line. Generally, if the price move above the 20DMA, the +DMI crosses the -DMI. But it has not happened this time. Still needs some more striking positive moves to get the bullish bias. Because the Nifty traded in a narrow range in the consolidation, the ADX has flattened. The index is coming out of oversold and consolidated for enough time. The bounce is common in the nature of a counter-trend. Trust the bounce only above the 50DMA or above 61.8 per cent retracement levels. Otherwise, all the counter-trend rallies are continuation patterns. The downtrend will resume once the counter-trend is ended. As stated above, sudden and striking moves or deceiving bounces are common in this bear market. Remember that the Market is in a downtrend; any aggressive bullish bias will add the risk. Be defensive and focus on only short-term bets. Focus on the stock which has given above-expected results fundamentally and better relative performance technically.

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