Wkly Tech Analysis: Time to exercise extreme caution

The markets exhibited sideways movement this week, albeit with somewhat higher volatility towards the end of the week. The Sensex swung in a range of 444 points; incidentally, the high and low for the week was registered on Friday. The BSE benchmark index finally ended with a marginal gain of 12 points at 18,531.

Among the index stocks, Hindustan Unilever zoomed nearly 12 per cent to Rs 232. DLF, Bharti Airtel, ITC, Jindal Steel and Hero Honda were the other major gainers. On the other hand, Maruti shed 3.5 per cent at Rs 1,244. Mahindra & Mahindra, HDFC and HDFC Bank were the other prominent losers.

The monthly Fibonacci chart indicates stiff resistance for the Sensex in the 18,600-18,800 range. And on the downside, the index has some support around 18,250-18,150, below which one can expect deeper cuts. The NSE Nifty moved in a range of 133 points, the index touched a high of 5,605 and a low of 5,742, and eventually ended with a minor loss of seven points at 5,545.

The short-term (20-day) daily moving average on the daily charts is at 5,682, and the medium-term (50-day) daily moving average is at 5,649. As and when the short-term moving average falls below the medium-term moving average, it will reinforce the strength of the bears. Currently, both the aforementioned averages are below the long-term (200-day) daily moving average.

The bigger worry is that the short-term (20-week) weekly moving average has dropped below the medium-term (50-week) moving average, which is a negative sign. Also, the weekly MACD (Moving Average Convergence/Divergence) and the Stochastic Slow are signalling a negative trend ahead. The weekly MACD has been in and out of the bearish zone, notably at least twice in the last two years, wherein the index thereafter corrected around 20-30 per cent. But this time around, the worrying part is that the MACD is going negative along with the moving averages, which was the case in May 2008.  And we all know what happened then, the benchmark indices almost halved by the time the MACD bottomed out, and turned back positive. Hence, one needs to exercise extreme caution in the markets at the current levels.

Charts indicate that the Nifty is likely to face stiff resistance around 5,630-5,670. And given the negative momentum indicators, the index is unlikely to sustain gains, if any, at least in the first half of the week. On the downside, a move past 5,400 will open the doors for a sharper fall to 5,200-odd levels. At the risk of sounding too bearish, one needs to understand that the monthly charts indicate a close below 5,400, which can possibly lead to a significant downfall up to 4,700-odd levels.