Nifty correction not over yet, go short on any upmove: Technical analysts

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With benchmark indices Nifty and Sensex falling for the third day in a row, technical analysts are increasingly finding it difficult to predict a bottom for the markets. 

The technical analysts expressed concern that if there is no meaningful recovery in the next 2-3 sessions, the Nifty could test 10,200 levels. And if these levels are breached, it could then be heading towards the 9,000-10,000-mark, they said.

“The kind of volatility we are seeing at present is typical of a bear market. The India Vix (volatility index) has gone all the way up to 20. This is seen during bear markets. The India Vix typically moves between 15-16 on the lower side and 22-23 on the higher side during such markets,” said Sneha Seth, derivatives research analyst at Angel Broking.

On Friday, the 50-share Nifty ended 2.7 per cent or 282 points lower. In the last three sessions, the Nifty has lost as much as 691 points or 6.3 per cent. The index is down 13 per cent from the peak it touched on August 28.

Seth added that there is fresh build-up of short positions which is driving the present correction. “Whatever correction we saw in the last F&O series was largely due to unwinding of long positions or profit booking. But the current sell-off is driven by fresh short positions, which is a cause for concern,” she said.

Technical analysts said that in such a market, it is difficult to guess support levels. “The Nifty has breached the 200-day moving average (DMA) mark as if it never existed. The gap-down opening on Thursday itself was below 200 DMA. In such phases, even important support levels are not respected by the markets,” said Hadrien Mendonca, senior technical analyst at IIFL Securities.  

Mendonca added that even the current chart formation indicates another phase of correction. “The last three-day fall has created a three black-crow pattern on the candle-stick charts, which is considered a launch pad for another phase of decline. The strategy in this market will be to sell on rally. On the downside, another 150-point decline cannot be ruled out,” Mendonca added.

Experts said that the major causes of concern – rise in crude and dollar – are unlikely to abate anytime soon. “On technical charts, we see crude rising to $90-$91 a barrel. The rupee could see some cooling off after spiking to 75 against the dollar,” Mendonca said.

All these factors could end up putting Nifty firmly into a bear territory in the coming sessions. “The Nifty has breached its crucial weekly moving averages on its way down. In the last session, the index broke the lower end of the reverse channel as well. This near vertical fall has pushed the weekly momentum indicator into negative territory. The short-term momentum indicators have been pushed into the mega-oversold zone, which allows the index to slide without looking for a bounce. In terms of the wave structure, the Nifty is forming a wave extension on the downside, opening up lower levels for itself,” said Gaurav Ratnaparkhi, senior technical analyst at Sharekhan by BNP Paribas.

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