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After violating a critical near-term support a week before, Indian equity benchmarks suffered their worst-ever weekly decline in a decade.
In line with the global mayhem, Indian stocks also saw a sharp meltdown and the indices went on to end well below key moving averages, slipping further from the broad trading pattern, which they had breached a week before.
After swinging in a wide range of 2,196 points, Nifty registered one of its biggest falls in absolute terms losing 1,034 points (-9.41%) on a weekly basis.
Amid this global mayhem and the crisis that has affected most markets across the globe, it would be more helpful for traders and investors alike to take a look at the more comprehensive technical setup and understand the developments with a broader perspective.
We will use long-term line charts instead of candles to understand this setup, as we will take the closing prices for this analysis.
It is evident from the long-term weekly line chart that the more-than-a-decade-long uptrend has not been violated yet, despite the strong correction.
After declining from 6,397 to 2,658 in 2009, Nifty consolidated in the 2,659-3,055 zone.
After that, it started an uptrend, and even after 11 years, that uptrend remains in force despite the violation of key support levels.
Correction from higher levels was anticipated, but the present corrective move was swift and more intense than expected.
Nifty breached the broad trading pattern and the 100-week moving average, which was acting as a proxy trend line a week before.
In the week before, Nifty also breached the 200-week moving average, which is currently placed at 10,301.
Nifty will see a shaky start to trade in the coming week.
The 10,300 level, which is the 200-DMA, and 10,610 level, will act as overhead resistance in the event of a technical pullback.
Support will be the trend line area at 9,600, followed by 9,100 levels.
The weekly RSI stood at 22.47; it has marked a fresh 14-period low, which is a bearish indication.
The RSI, however, also remains neutral and does not show any divergence against price.
It remains in the oversold territory.
The weekly MACD is bearish and continues to trade below the signal line.
Pattern analysis showed as long as Nifty keeps its head above the 9,600-9,700 zone on a closing basis, the long-term uptrend will remain intact.
Any breach of this will have the potential to reverse the primary trend going ahead.
Over the next couple of weeks, some amount of consolidation along with technical pullback cannot be ruled out.
However, the steep decline has brought the resistance zones much lower.
Given the current technical setup, it will not be surprising if Nifty pulls back some more and oscillates in a broader 500-point range before it gives any indication of bottom formation.
We would strongly recommend not chasing the technical pullbacks as yet.
Some amount of pattern area formation and its resolution on the higher side will be required for a confirmation of a temporary bottom.
Short covering is likely to continue, and this will bring down in volatility some bit, which is currently at a decadal high.
A highly stock-specific view is advised for the coming week.
In our look at the Relative Rotation Graphs, we compared various sectoral indices against CNX500 (Nifty500 index), which represents over 95% of the free-float market0cap of all the listed stocks.
A review of Relative Rotation Graphs (RRG) shows a defensive approach is at play in the market.
If one attempts to make purchases at lower levels, then FMCG, consumption, IT and pharma sectors are to be looked at, as they are showing signs of strong relative outperformance against the broader Nifty500 Index.
Consumption and FMCG sectors are rotating inside the improving quadrant, even as they maintain their relative momentum.
IT and pharma have already entered the leading quadrant on the RRG.
Besides these sectors, which are likely to collectively outperform the market on a relative basis, all other key sectors are lagging.
The PSU bank, energy, auto, PSE, metals, infrastructure, commodities indices and Bank Nifty are placed in the lagging quadrant, which may lead to underperformance of these sectors against the broader market on a relative basis.
Important Note: RRGTM charts show the relative strength and momentum for a group of stocks.
In the above chart, they show relative performance against the Nifty500 index (broader market) and it should not be used directly as buy or sell signals.
(Milan Vaishnav, CMT, MSTA is a Consultant Technical Analyst and founder of Gemstone Equity Research - Advisory Services, Vadodara.
He can be reached at This email address is being protected from spambots.
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