Weekly Market Recap

In my last article, I pointed out that market condition seems to be ameliorating based on positive market breadth, developing upside momentum and most importantly markets ability of neglecting negative news. This week, we saw knee-jerk reaction on Tuesday when NIFTY slipped more than 250 points, however, market snapped out of it and managed to recoup more than 50% of its losses.

In the week gone by, the benchmark SENSEX lost 535 points, or 1.68% to close at 31327, similarly, NIFTY was down by 112 points, or 1.21% to close at 9154. While BANKNIFTY couldn’t recovered much and was down by more than 5%.

Current Outlook

This week its look like things have again turned out to be deteriorating. The improvement in market conditions I noticed last week have failed to gained strength, in fact weakening, instead. Diminishing upside momentum is cause of concern as there is no follow through from its previous week high for the indices. It is indispensable to note that despite some of heavy weights rallied over 10% this week couldn’t support the NIFTY to lift above previous week range as can been seen in the chart below. Furthermore, the VIX which has been atypical high level for quite some time continued to ease-off as expected, that should have prompted a rally of at least of some magnitude, but it didn’t happen as a result became a case of negative divergence that indicates a plausible correction in near term.

Technically, Fibonacci retracement enunciate that rally stopped precisely at 38.2%. There are several choices, but few important retracement levels are 23.6%, 38.2% and 61.8% (see the chart below). When I see the current 38.2% retracement level in conjunction with other indicators like volume and RSI, I found that they are not positioned in harmony with the price action. Volume is declining and RSI barely came back to life after having oversold while price recovered significantly from its lows. This kind of action is more akin to a bear market characteristic than an initial rally in a new bull market. It is not a prolific but conundrum, instead.

Good news is, NIFTY is still holding at the top end of the short-term range. The impending best-case scenario for NIFTY is to spend few more days in a narrow range that consequently will develop the flag formation that eventually may take out the NIFTY at higher levels. So far, the probability of this scenario is tenuous. Hence, outlook is pernicious and gloomy.

Conclusion

In these volatile times, it’s quite possible that a lot of these short-term discrepancies get cleared up and we move to new recovery highs. As of now, though, a NIFTY at 38.2% retracement level, which means that next week’s action is likely to be critical in either direction.

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Pankaj