The monetary policies of the US Fed and the Reserve Bank of India led to the stock market crash in the global and Indian stock markets. National benchmarks posted weekly losses after November 2020. The Nifty fell 691.3 points or 4.04% in just four trading sessions. The BSE Sensex lost 3.9 percent. The broader indices, Nifty Midcap-100 and Smallcap-100, fell 4.3% and 6.8%, respectively. All sectors ended with deep cuts. The Nifty Realty lost 8% and other sector indices fell 4-5%. FIIs sold massively by Rs12,733.46 cores, and DIIs only bought Rs8,533.26 cores. The volatility index, India VIX, rose 9.45% to settle at 21.25.
Technically, it broke all key supports last week as it broke the 61.8% retracement level. Over the past, the market has seen volatility and the risk of surprise events. The US Fed and RBI quantitative easing policies have come to an end. With the rise in interest rates, the markets felt the tremors. The S&P 500 and Nifty-50 indices closed below major support levels and confirmed the long-term downtrend. On the weekly chart, the Nifty formed a large bearish candle after the third week of November. It closed below the 61.8% retracement level (16604.75) and fell below the December 20 low (a major low). The probability of recovery and the chances of forming an inverted head and shoulders have been erased.
At the same time, the 20-week average, which had been resistance in the previous weeks, entered a decisive downtrend. Even the 30 week average is also in the downtrend. This indicates that a long-term downtrend is imminent. The distance between 50DMA and 200DMA increases after a deadly crossover on April 18. The Nifty is trading more than 4.2% below the 200DMA. As all the moving averages are in a downtrend and the price is well below these trend indicators, the strategy should be tilted down.
On a daily chart, the Nifty has formed a perfect southern Doji candle. On March 7, it also formed a southern Doji and rebounded from oversold conditions. The similarities between these Doji are formed on a large downward opening. The previous Doji candle was followed by a bullish engulfing candle as it opened negative and closed higher. Currently, there is a likelihood of a bounce as the Nifty closed below the lower Bollinger band. If a positive close is not possible, then a lower close will lead to a continuation of the current downtrend. Although the rebound occurred on Monday, it could be short-lived. Only in case the Nifty closes above the 50DMA (17060), the rebound will hold for a certain period and can test the 17206 (200DMA). Beyond these levels we cannot predict, as they are currently very resilient. The 38.2 and 50% retracement levels (17018 and 17227) of the current decline are also almost at the same levels. Ahead of these resistances, the gap zone resistance stands at 16651. The upside of short cover may end here and will attract further selling pressure.
The RSI is at 35.29 and close to the oversold zone. The 14-period weekly RSI is well below 60, and the daily RSI below 40 is another bearish signal for the market. After July 2002, the weekly MACD line dropped below the zero line for the first time. The ADX is rising, and -DMI is above the previous high and above the +DMI, and the ADX is showing a strengthening downtrend.
Either way, Friday’s low is protected for the next three days and forms a large bullish candle on a follow-up day, then the market status can be changed to Rally Attempt. In this scenario, the Nifty can test the 17060 to the max.
As projected in the last columns, the Dollar Index (DXY) closed at the highest level after November 2002. When the interest rate cycle has bottomed out, equities will be at the top. This inverse relationship has been discussed several times earlier here. Bond yields are rising, and other asset classes like gold are also in a clear uptrend. The DXY is currently trading at $103.66, and a close above $104 will test $128 sooner or later.
For the next week, the Nifty could see a technical pullback and consolidate for a while before taking another leg of a trending move. The pullback will give us a chance to exit profitable positions from the portfolio. There is very little room for new short positions. Friday’s 16340 low is crucial support going forward. The market is not conducive to building portfolios and making new purchases.
(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)