Nifty forms long lower shadow candle

Equities bounced as the RBI announced an interest rate hike less than expectations. The market participants expected that RBI might follow the other countries by raising 75 basis points. The benchmark indices bounced from the day's low. The Nifty was down by 233 points or 1.35 per cent during the last week. BSE Sensex also declined by 1.2 per cent. The broader indices moved in line with benchmarks. The Nifty Midcap-100 fell by 1.3 per cent, and the Smallcap-100 down by 1.5 per cent. The India VIX declined three per cent. Except for Friday, the market breadth is negative. FIIs sold Rs18,308.30 crore in September. The DIIs bought Rs14,119.75 crore.

After a 1348 points decline in the last 12 trading sessions, NSE Nifty showed a significant single-day recovery last Friday. It recovered most of the weekly losses. It formed a long lower shadow candle on the weekly chart. But the strong recovery failed to test the gap area. The most important technical development is that the Nifty reclaimed the 200DMA after spending two days below it. In the last five sessions. This long-term average acted as resistance for two days and support for another two days. Though it moved above the 200 DMA, the index is still below the short and medium-term averages. The Nifty normally ends a swing in eight days. The current swing ended in nine days. The index also came out near oversold condition. Currently, Nifty is now three per cent below the resistance line. Friday's recovery tested the double top breakout level and closed below it.

On a monthly chart, the index has formed a shooting star kind of a bearish candle and an outside candle. Holding ten months moving average. There are no divergences seen in the long-term charts. In any case, the monthly RSI closes below the 55 zone, which will be a big negative for the market. As mentioned earlier, the monthly MACD and KST lines have been declining for the last one year. The bearish momentum has clearly picked up. Before discussing the levels to be watched in the near term, let us also look at the global markets.

The Dow and S&P500 indices formed another lower low last week. They declined below the monthly support. The S&P500 declined by 25.65 per cent from its January high. These indices made new lows. The Nasdaq composite index declined by 34.79 per cent since its all-time high. Whereas our benchmark index, the Nifty, is just 8.12 per cent below all-time high. Importantly, the Dow is 2.88 per cent below the pre-Covid high. In contrast, the Nifty is 37.51 per cent above the pre-Covid high of 12430. The other global indices also fell below pre-covid highs.

Historically, October month is more volatile for the equities. Importantly, the world's top investment bank Credit Suisse looming into big trouble and is at a 'Critical Moment', as said its CEO. This may ring the danger bells in global markets. The Dollar index (DXY) is at 20 year high at above $112 is another setback for the market as the ongoing Quantitative Tightening across the world will squeeze the liquidity. The USDINR is almost at Rs. 82, which is negative for imports and the balance of payments. The forex reserves recorded the steepest decline in six months to $537.52 billion.

With the above scenarios, our markets may be headed for a correction to a reasonable level. The outperformance may not continue further. As long as the Nifty trades below 17489, the market structure is weak. There is a higher probability of testing 16300 in the near term, which is a 61.8 per cent retracement level of the prior uptrend. Stay in cash and sideways for now. Short-term bounces may not sustain.

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