The previous week’s subdued close was not surprising as a breather was expected ahead of Trump’s tariff announcement. However, the depth of last Friday’s fall came against the run of the play, especially with earnings season as well as the history of positive April was expected to insulate markets from large falls. Let us see if the present set-up can avert a covid-like collapse.
Broader market wilts
Clearly, the short-term recovery move has been broken, characterised by two aspects. Firstly, an evening star candle stick pattern in Nifty’s weekly chart points at reversal. Secondly, 75% of Nifty 500 stocks closed below their respective 10-day moving average, a benchmark for short-term trends.
Nifty IT breaks down
Last week, we lined up the conditions for the Nifty IT Index making a U-turn. Unfortunately, such attempts met rejection trades and bore the maximum brunt of the heavy selling that took root in the US last week, a theme that has been playing out for some time.
Nifty IT has broken below the widening wedge pattern forming a weekly Marubozu candle marking the second biggest weekly fall since March 2020. Also, the index has broken below the 200-week moving average (WMA) for the first time since March 2020.
In the past, the Nifty IT index has closed below 200 WMA seven times in the last 15 years and on each of such occasions, it took an average of five weeks for the index to move back above the average. One interesting fact is that six out of the seven times when the index broke below the 200 WMA, it saw an average 12% upside in the next three months. Next week would be interesting as Tata Consultancy Services kicks off the Q4 earnings season, but April has not been good for the IT sector post-Covid.
FMCG facing the heat, but may recover quicker than most
The Nifty FMCG Index has been in an uptrend till September 2024 and broke below the rising channel support in November resulting in a structural change. The index has been moving within a downward-sloping trend channel since November and the bounce from the channel support of 50,750 seems to be losing steam near the channel resistance of 54,100. Possibly we are going to see a continuation of the downtrend towards 50,800 and 48,000. Keep in mind that a push above 55,000 on a closing basis would turn the tables around for the index, and we feel that this index is primed to recover the quickest.
Nifty outlook
While we did keep on weighing the prospects of a large downside all through last week, we felt 23,050-22,960 or the 22,750-522 bands to defend sharp slippages. We had also taken cues from the fact that VIX remained muted despite the declines, and even rose just 1.1% to close at 13.75 on Friday, on a day when Nifty fell 1.49%. In short, the present structure appeared hardly primed for a collapse per se.
The overnight collapse in US markets will apparently flow through this set-up on Monday. But beyond the anxiety about how to deal with Monday, the key question is whether we need to brace for a Covid-like event, where the collapse was dramatic in terms of losses as well as the speed with which it panned out. In such a scenario we could eye 20,200-19,800 as the initial downside objective.
However, unlike the months that led to covid breakdown, which saw a sustained period of sideways trade that hinted at exhaustion, we are now six months and 15% away from the peak during which period there were multiple and sizeable swings on either side. This suggests that going forward, correction could be largely in the form of time, rather than price.
We also have seasonality in our favour, with April generally in favour of Nifty and most sectors. This sets up for a recovery attempt to be staged from inside the 22,500-22,350 regions, which make up the bottom half of the evening star candle in the Nifty weekly chart. In the event of this region giving away, only a direct fall below 21,800 would force us to put 19,800 as a possible scenario. As is, the odds of the same is low.
First published in Financial Express
