Weekly Market Recap

Indices ebbed off after reaching the previous high as a result the double-top formation is quite evident as we can see in the chart below. With this formation, NIFTY has defined its overhead resistance which seems to be quite challenging now.

In the week gone by the benchmark, SENSEX hit a new all-time high on Wednesday but soon descended and settled with the loss of 405 points, or .64% at 62979, while NIFTY fell short of the milestone by a whisker and in the end closed down by 160 points or .85% at 18665. BANKNIFTY too moved in line with the major indices and shed 0.72%.     

Current Outlook

In my last weekly notes, I emphasized paying attention to the individual stocks which were exhibiting a promising upside potential after breaking out of large consolidation patterns, and in the past two weeks we have seen many stocks reaching all-time highs.  

Now, the most dominant feature on the chart is the double-top formation which is followed by the weak market breadth and extra volatility in terms of change in the price of the stocks. At this juncture, each of the moving averages remains in an uptrend, however, the indicators in the below panel are rolling down suggesting a pullback or a change in upside-down momentum. I have witnessed a drastic change in behavior from market breadth to momentum which is quite alarming.

In the past two years, we have seen a similar change in behavior which has resulted in a sharp decline. While I’m not anticipating a decline of that magnitude, it’s important to be aware of what to be on the lookout for to signal more than just a 5% pullback. These signals can be used for individual stock holdings as well. At this time, I’m focused on names in leadership areas that are holding in better than the markets. These stocks will go on to be your top performers once the market pressures are lifted, but exit discipline is the key.

Conclusion

Given all the evidence above and the technical pattern which has been repeating well in the past two years, it is quite feasible NIFTY may drop 5% to 20%. Hence, it is indispensable to protect yourself from extreme downside risk by simply keeping a tight stop.

Feedback, comments, suggestion, or questions are welcome in the below comment section or at [email protected].   

Be Patient; Be a Savvy Investor..!!

Pankaj