NIFTY Index Chart Analysis - Is it time to bounce back?

Since the last month or so the performance of the Indian as well global markets has been driven by the corona virus pandemic. The rapidly spreading virus has produced both a health and economic crisis. The mounting death toll and the lack of a cure or vaccination has thrown cold water on the efforts of the US Federal Reserve and unprecedented stimulus package provided by governments to combat the impact of the deadly virus on the economy. With no definite end in sight, foreign portfolio investors (FPIs) sold Rs.65,817 crore worth of shares in March in Indian equities markets – the highest ever selling in a single month.

But even as the bulls on D-Street were gasping for some cheerful news, soon they got what the doctored ordered. Optimism returned to the markets with news that the pandemic may be peaking in a number of hard-hit places. The icing on the cake was a historic stimulus announced by Japan’s Minister Shinzo Abe to combat the impact of the virus on the economy. As a result, Nifty staged its biggest one-day gains since May 2009 as it rose 8.7 per cent to end at 8,792 levels. 

All the sectoral indices ended in green on Tuesday with Nifty Private Bank, Nifty Pharmaceuticals and Nifty Bank gained the most with 11.07, 10.43 and 10.42 per cent gains, respectively. Further, the fear gauge India VIX declined and hit a month low of 52. On March 27, Nifty registered a swing high of 9,038.90 and thereafter in the next four trading sessions it retraced about 61.8 per cent of its earlier three sessions up move. With the slower pace of retracement it clearly hinted that the bears were losing their momentum as the golden ratio of 61.8 per cent retracement acted as strong support.

Now that the Nifty has made a higher low, it needs to move above the valley point of 9,038.90. In any case if this becomes a possibility, a double bottom breakout is likely to take place. If we see a lower time frame in terms of an hourly chart, a counter-trend consolidation pattern of a flag is clearly visible. The index has also reached near the 20 DMA. 

This could act as a minor resistance as well. As mentioned earlier, Tuesday’s move is also a result of a culmination of slowing bearish momentum. The MACD histogram clearly indicates this trend.

The leading indicator RSI has reached a resistance level as defined by the downward sloping trend line. RSI has crossed the 40-mark and it is out of the oversold condition. If we check history, it is quite evident from the previous bear markets that rallies are usually quicker. These kinds of V-shaped recoveries are quite common in bear markets, but these rallies will not be defended for a long period. For traders who are long on at this point of time, we recommend maintaining a strict stop loss of the 8,500 mark. For any short positions, wait for a reversal and close below the prior bar low. 

Have we formed a bottom or is it a dead cat bounce? Well, it’s too early to say that we have established a bottom and it is important that market participants don’t play all their cards at once. Why do we say so? That’s because Nifty is yet to close above its important short-term moving average i.e. 21 DMA and we are still trading significantly lower from the 100 DMA and 200 DMA. Further, both the moving averages are in a declining mode. Most of the gains which we are witnessing right now are because of a short squeeze in the market. Also, market participants are anticipating a big stimulus package to counter the virus fallout.