Weekly Market Recap

This week’s reaction was precisely opposite to the last action. As we can see the shaded portion in the chart below, last week NIFTY persistently went up with gap opening each day; this week it has reversed sharply and vanished the meteoric rise occurred last week. This could be a sign of trouble unless proven otherwise.

In the week gone by the benchmark, SENSEX lost 484 points, or .79% to close at 60821, and NIFTY fell a few notches extra with a loss of 223 points, or 1.22% to close at 18114. While BANKNIFTY had an interesting move and bucked the downtrend to gain 2.5%.

Current Outlook

When I began looking at the index chart, along with sector one thing became apparent very, very quickly. In the near term, we appear to be running out of bullish momentum. As enunciated and annotated in the NIFTY chart below, divergences are negative across many key sectors, and industries, not to mention the largest market cap companies as well. This is surprising and quite interesting to see that most of them are exhibiting a similar pattern (including Tata groups of stocks). That is a problem, although, it is not necessarily an insurmountable problem. Sometimes, divergences can get rehabilitated. Negative divergences guarantee us nothing, but these are a large number of key charts that reflect a similar pattern of slowing momentum. And many of them show key price resistance being tested simultaneously.

It’s also noteworthy that we have seen a vertical gain in these stocks which is quite vulnerable to a sharp pullback. For now, however, this is just a warning sign, whether it is really a sign of peril or not, only time will tell, but history says the sharp pullback occurs when a large number of stocks exhibit a similar weakness.

Now the silver lining is banking stocks, they have done exceptionally well in the falling market the breakout that occurred last week in BANKNIFTY is still intact, but the negative divergence is also the case here, let see how they turn out next week. If they continue to perform well, they may preclude the downfall on indices.

Hence, as of now, the outlook appears to be in midst of chaos.

Conclusion

The high volatility at the higher is not a good sign. Most of the time but not always stocks correct sharply after having abrupt moves in the aftermath of vertical gain. As I mentioned above, we have got a warning sign, whether it is the sign of peril or not would be clear in the forthcoming week. Meanwhile, caution is warranted, and patience is required.  

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Pankaj