Whiff of consolidation, but bears rule

It was a disastrous week for Indian markets as weakness in heavyweight sectors like banking, auto, oil & gas and capital goods dragged the benchmark Nifty lower by 2.5% for the week. Speculative sectors like metals and realty suffered the biggest cuts while defensive ones like healthcare and FMCG outperformed with modest gains. Advance: decline ratio remained very weak throughout with sharp cuts seen among many mid-cap stocks. Volatility rose during the week on account of August derivatives expiry and expectation of stimulus from Ben Bernanke’s speech at Jackson Hole.

Nifty formed an ‘Evening Star’ candle pattern on weekly charts on high volumes, which carries severe bearish implications in the short term. More importantly, the make or break (MOB) levels of 5364-68 were decisively violated during the early part of the week, confirming the trend change to bearish and  vindicating our cautious view over the past three weeks. Nifty has also formed a Doji candle pattern on monthly charts, which indicates indecision while monthly momentum shows an overbought reading suggesting that large recoveries from current levels are pretty unlikely.

Bank Nifty has closed the week below the July low of 10065 and has also violated the crucial MOB levels of 10095-10167, confirming that the index has entered a bearish trend from a broader viewpoint. Private banking stocks like ICICI and Axis Bank also violated their individual MOB levels and now a “sell on rallies” approach should be followed. Axis Bank has violated the trendline of a loosely formed ‘Bear Flag’ and is susceptible to large downsides from current levels and will be a top choice to sell on rallies.

Vindicating our view, metal stocks witnessed a carnage during the week as the BSE Metals index broke below the June low of 9726. Traders should now watch the levels of 9364-9162 for support, but it is better to avoid this sector for long positions as it shows one of the weakest price characteristics compared to other sectors.

It was a disappointing development for the bulls who were gung-ho on the breakout of Reliance Industries from the Falling Wedge pattern discussed in this column over the past two weeks. Reliance Industries has closed below both the MOB zones placed at 778-785 & 766-768, and unless there is quick recovery in the early part of the week, a breakout failure will be confirmed.

Breakout failure is a very bearish development for any stock as usually a sharp move on the opposite side is seen. BSE Oil and Gas index has reversed after facing resistance from the Falling Wedge trendline while also violating a crucial support near 8240 levels and further downsides are not ruled out in the immediate future. Auto index also behaved on expected lines, reversing from the corrective Flat pattern and is expected to move towards the short term objective of 8900 levels.

While western equity indices like Dow Jones Industrial, FTSE, DAX etc closed flat for the week, Asian market suffered modest losses with China Shanghai composite losing over 2.5% to suffer a fourth consecutive decline. Hang Seng, Japan Nikkei and Taiwan, which had completed bearish 3 wave patterns, continue to exhibit weakness and further downsides are not ruled out in the immediate short term. US CBOE VIX rallied by about 15% during the week which is its second consecutive weekly gain after bottoming out at the lower end of its historical range and is likely to remain firm in the immediate short term.

Nifty now faces support at the rising trend line drawn from the June lows which comes into play near 5200. There is also a cluster of 38.2% and 61.8% retracements drawn from June and July lows placed at 5189-5191 and can offer support to the current decline. However, the most important price cluster is placed at 5109-5133 which also consists of the 50% retracement of the entire rally from June and hence, will become an important trend decider for the broader trend. Daily momentum is showing an oversold reading now and can aid a dead cat bounce or a consolidation at current levels but is unlikely to push the Nifty above 5365 levels.

The writer is senior vice-president,derivatives & technicals, at Violet Arch Securities