It’s time to book profits, avoid aggressive buying

The Indian stock market closed positively for the fifth consecutive week with moderate gains. The market started out strong and ended in strong weakness. The leading index, Nifty, closed at 17758.45 with 60.30 points or a gain of 0.34%. The BSE Sensex also gained 0.3%. The broader indices, Nifty Midcap-100 and Smallcap-100, rose 0.6% and 0.4% respectively. Sector-wise, the Realty index was the biggest gainer with 1.6%, and energy and consumer staples were up 1.6% and 1.1%, respectively. Nifty Pharma and Bank Nifty were down 0.5% and 0.2%. FII bought Rs 17,970.62 crore and DII sold Rs 6,052.67 crore. The volatility index gained 3.485% to 18.28.

Finally, after five weeks of consecutive victories, the benchmark index showed signs of weakness. NSE Nifty closed below the four-day low and formed bearish patterns on both weekly and daily time frames. On a daily chart it has formed a Bearish Engulfing candle, and on a weekly chart it has formed a Shooting Star candle. We continue to warn against the tendency to maturity and exhaustion. Friday’s drop gave a clear reversal signal. We also mentioned that the Nifty behavior around 18000-100 is crucial for the future trend. As expected, the index formed a reversal candle at the swing high; with all probabilities, it may be the middle vertex. As long as it’s trading below Friday’s high of 17992, aggressive longs are best avoided. As the Nifty has taken support at 8EMA, which is almost at the support of the August 16 gap zone, a breakdown will confirm the bearish implications of the patterns formed over the weekend. It also added a distribution day. Currently, the Nifty is holding two distribution days. An increase to five days of distribution over the next two weeks means the market is once again in the grip of the downside.

The Nifty has formed 14 consecutive high candles since July 27 (ignore the inside bar on August 5), which is the longest streak in recent times, and above all it is nothing but an overloaded market. This is one of the reasons for last week’s caution. All candles at the swing are bearish in nature. Notably, the Nifty was hesitant to close above the sloping trendline resistance. The index has formed near-parallel high bars over the past three days. Now the Nifty has closed below the previous three bars. We can now consider negative options with the above signals.

When we are open to negative options, we must consider probable downside targets. In past downturns, the index has fallen 50-78%; at the start, it will be necessary to breathe a little. These retracements are violent in nature. We assume that history will also repeat itself (history-based technical analysis repeats philosophy) this time. The first support is at 17329 (23.6%), 16919 (38.2%) and finally 16587 (50%). In the worst case, a close below 16256 (61.8%), the Nifty tests the previous lows (May 13 and March 8) or 15784 (78.6%). I expect a base at this level forming a higher low. If so, it is a reality, the basic consolidation will take at least 8 to 13 weeks.

For now, avoid aggressive buying and try to get the profits back on the table. The very cautious approach is the need of the hour. Apply risk and money management practices to protect capital.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)