Key points for the week:
The weekly drop in NIFTY and BANKNIFTY that we experienced during the week was reminiscent of the 2008 market crash
Crash in Indian markets was much lower during the week compared to leading Global indices. While the weekly losses in S&P 500 and DAX were 11.5% and 12.4%, that in NIFTY was near 7.25%
The rapid increase in Coronavirus infected patients outside China – especially in Europe, US and Korea triggered panic wave across the globe
The downward momentum is very strong, and many markets may extend losses further. We may see a short corrective rally before the further impulsive down move continues
What a week it was! Such volatility was coming back after a long time. We had seen a few bursts of volatility since 2008, the last one being in October 2018. But the breakdown this week was far more powerful. It was not a surprise to see a correction, especially when in the big picture the market was in a solid uptrend since September 2019 that had not seen any noticeable correction. As an effect, all the traders and investors across the globe were getting complacent, and the market was waiting for a shakeout.
In our bulletin on 17th February we had highlighted possibility of this fall that would lead the market to 11600 area. Little we knew back then that it would happen with such a rigor. The Coronavirus was not the fundamental cause of the break, but just a trigger in an overbought market. The real fundamental reasons were weak and were already known – such as increasing unemployment, reducing GDP growth rate, declining industrial production as well as increasing inflation. The markets were continuing higher highs in spite of fundamentally weakening economies. However the price action in January suggested that the rally was dragging, and was lacking strength to continue momentum to the upside. In such cases, the market is overbought, and usually looks for an excuse (a news) to trigger the fall.
WEEKLY PRICE CHART FOR NIFTY 50 INDEX
The parallel channel in which NIFTY had been rising for past few years has been broken on the lower wall. The vicious move last week had taken out almost 15 to 16 weeks price action. Though the week has ended in a prior demand area 11090 – 11310, at the level of current momentum it may not hold up for long. It is possible to see a minor pullback from that area, that may even extend up to the prior swing low at 11650, before NIFTY continues move downwards. Alternately the market may extend losses upto a lower demand area at 10660 – 10850,
As I write, I had the price action of Monday (2nd March) in front. The market gapped up and stayed there in a narrow range for most of the day, until the news of two Coronavirus cases in India came out. For intraday, that acted a trigger to take NIFTY down by more than 160 points. The daily chart now shows two solid red bars, the second one completely engulfing the first one suggesting weakness to continue.
DAILY PRICE CHART FOR NIFTY 50 INDEX
As we see NIFTY has consumed the current demand area 11090 – 11310 (from weekly chart), it would now be looking at the lower one at 10660 – 10850. This is the same area from where the market rallied in September 2019, after the Finance Minister announced corporate tax SOPs.
From the intraday picture we get an interesting insight. Though NIFTY gapped up this morning and prior consolidation area from Friday’s price action, it traded for most of the morning and early in the afternoon in a very narrow range. In fact, it never broke out of 15 minutes opening range until afternoon.
INTRADAY PRICE CHART FOR NIFTY 50 INDEX (Hourly)
It was clear indication that the buyers are definitely not coming in yet, the sellers are strong, and those who are short are not looking to book profits. The Coronavirus news was only an excuse for the market that was already weak, and wanted to continue its drop after a short breather.
With this price action, we can expect the next two days to remain volatile, and it is possible that the investors would extend losses until NIFTY reaches the earlier mentioned demand area at 10660 – 10850. Whether that area will hold – only time will tell.
Among the key fundamental numbers this week are the manufacturing production/ industrial production for January and inflation rate for February that will be published on Thursday. On Friday we shall hear about trade balance during February, where the deficit had widened beyond expectation in the previous month. A little better than expected performance may trigger short term rally, if NIFTY happens to be in the demand zone at that time.
The markets are in a solid downtrend for now, and the momentum is strong. NIFTY is eyeing 11660 – 11850 region and will take the key stocks down with it. We can expect NIFT to get there my mid of current week. In the long term it is to be seen whether the market will break down further or will change to sideways. Given global trends, it is unlikely that a bull run would resume soon.