Weekly Market Recap
NIFTY, since accumulating at a lower level in the past few weeks gathered some stream and broke out above the 16400 level on Monday. Breaking above that level, it was expected that the rally may further extend to a higher level. Although it stayed above that level for the rest of the week and made an attempt to rally further on Friday, however, the selling intensifies at a higher level, consequently, the gains were contained to the breakout level.
In the week gone by the benchmark, SENSEX gained 884 points, or 1.61% to close at 55769. Similarly, NIFTY added 231 points, or 1.42% to settle at 16584. While BANKNIFTY after outperforming with a big margin last week finished this week in red and lost 1%.
Current Outlook
Technically, The NIFTY is in a long-term downtrend and the composite breadth is mostly bearish throughout the downtrend but varies rapidly at times. The overall market regime is still bearish as a result the bulls are facing a stiff headwind at a higher level.
The chart below shows NIFTY in a downtrend. The red lines mark a falling channel with lower lows and lower highs, which is the most basic definition of a downtrend. The indicator window below shows the oversold conditions that have been relieved that suggesting the price is set to fall again. As the indicators have reached the middle level. Usually, in bull markets, they fall around the 50 levels and bounce back to a higher level, whereas, in continuing bear markets, they roll down as they rally up from the lows to the 50 levels. Hence, the current position suggests further weakness unless reversed decisively.
NIFTY became oversold two times with a move below the lower trendline of the falling channel (red shaded portion) and at the same time completed a double-bottom bottom and bounced back above 16000. It is quite common to have a counter-trend move after such configuration. A typical counter-trend bounce may retrace 50 to 61.8% of the prior decline or in some cases up to 75%.
In a classic downtrend like this, the bearish outcomes are more likely than bullish after rallying to some extent. There are important resistance levels where this bounce could fail. For this, I use retracements, broken supports, and prior resistance levels. Broken support levels turn into resistance because this is where supply last overpowered demand. Prior highs mark levels where supply was stronger than demand. NIFTY hit another resistance zone this week (red horizontal line) and fell back on Friday. Even if NIFTY were to break above this week’s high, I would still expect resistance at higher levels because the market regime is bearish.
Conclusion
The width of the downtrend channel is quite wide, in this case, the price may continue to drift lower while bounces will keep coming at a lower falling line. The best possible case for the reversal for NIFTY is to establish a base in the middle of the range and then rally sharply; unless that happens or any weight of evidence is visible, I presume, NIFTY is in a strong downtrend.
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Be Patient; Be a Savvy Investor..!!
Pankaj