The market is largely about sentiment, and anything can take sentiments from one end to the other in a matter of hours. Look at the first three trading sessions of the last week; while the Nifty 50 was weak, mid-cap stocks had done perfectly well. But on Thursday and Friday, both Nifty and market breadth were extremely weak. Correction in the last two trading sessions came when the global markets had risen. Market players always want to assign a reason for every move of the Nifty, but the reality is that corrections are part of the deal and when valuations are high, corrective moves are sharp and brutal.

Last week, an explanation being floated around for the market correction was the dip in macro numbers ten days back. Does the market need a full week to react? Another theory on the Street was that the government was coming out with a relief package to prop up the economy and hence it might destabilise the macro situation. Even if some measures put pressure on the fiscal situation, what matters more is the growth measures rather than any marginal change in the fiscal deficit. It all boils down to this. If a correction is due because of stretched valuations, it is bound to come, regardless of the explanations given.

International news flows were negative for the market last week. While it was being expected that the US Fed will not raise interest rates this year, the Fed, in its meeting last week, indicated not only the timeline for shrinking its balance sheet but also its intention to raise rates by the year-end. Also, there were indications that the Chinese slowdown could once again be bogging down global economy. This brought pressure on metal stocks in India. Since metal stocks have had good gains in the last fortnight, they came under sharp pressure, troubling the Nifty.

Coming to short-term oscillator charts, most short-term charts have given sell signals again, by turning south from overbought territory. The moving average convergence/divergence (MACD), on the daily chart, is on the verge of giving a sell signal as it moves down in positive territory after showing negative divergence. This negative divergence is a major trouble spot for the bulls as this is once again visible on most short-term charts and even on some weekly charts which used to show slightly longer term trend. Since this negative divergence failed to show its impact in previous weeks, it’s too early to predict a trend reversal.

But at the same time, as a rule, it would be better to take profit off the table and wait for the Nifty to come close to its earlier support level and see whether those support levels are held or not. If they are broken, it would mean that more trouble is in store. On the candle stick chart, more bearish patterns have emerged. On the weekly candle stick, a long black candle has got formed. Again, in this case too, a long black candle had got formed in early August but that did not have a follow up. The black candle formed last week needs further confirmation, if the same comes this week, that would mean the index could consolidate at lower levels. Traders have to remember that since this is a derivative contracts expiry week, volatility would be higher on at least two out of the five trading sessions. So, the Nifty could fall more on a technical reason than on fundamentals.

Coming to short-term support and resistance levels, the Nifty’s first support comes at 9,740. After this, 9,690 is a short-term support level. If the index breaks these two levels on a closing basis, the southward momentum would get accelerated. If the second support level is broken, that could affect market breadth and midcap stocks.

The first resistance for the Nifty comes at 10,040, which it needs to cross to give the bulls some confidence. After this, 10,175, the recent high formed, would be a trouble spot for the index. Resistance levels become relevant only when the slide stops and the Nifty makes an attempt to move up, and depending on the speed of the fall, the resistance would get developed. Retail investors should continue to book profit. Traders should have trailing stop loss even on intra-day long positions.

rajivnagpal@mydigitalfc.com