Chartists Remain Cautious: Market Rebounds Amidst Four-Week Selloff Uncertainty

After hitting a four-week low, the Nifty index showed an early rally this week, climbing past 24,400 in Monday’s trade. However, technical analysts and market experts are not yet convinced that the rebound signals a full recovery. Many continue to express concerns about further downside risk, especially across the broader indices like the midcap and smallcap sectors. This article will delve into recent market dynamics, including broader market weaknesses, foreign investor flows, technical levels, and expert projections, to provide a more holistic view of the current state and potential paths for the market.

A Worrisome Streak of Losses

Nifty 50 saw its longest losing streak since August 2023 last week, ending four consecutive weeks in the red. The broader market faced an even more challenging situation as midcap and smallcap indices posted their worst weekly performances since December 2022. This slide has led to significant wealth erosion, with over Rs 20 lakh crore of BSE-listed stock values lost in a single week. For market participants, this paints a sobering picture of the market's health and raises questions about the sustainability of past gains.

Critical Support Levels and Technical Outlook

Last week, Laurence Balanco from CLSA indicated the likelihood of Nifty 50 potentially testing the critical support level of 23,400 in November, putting the 200-day moving average (200-DMA) at risk of a downside break. Balanco’s insights point to historical precedents: Nifty has only tested the 200-DMA twice in the past 18 months, with this recent trend potentially marking a third encounter with this support level. Should Nifty test or fall below this threshold, it may signal a more protracted period of market weakness.

Indiacharts.com’s Rohit Srivastava added to the cautionary tone by advising against attempts to catch the market at perceived “bottom” levels, especially given the unusual nature of the current decline. Srivastava emphasized that this level of correction is unprecedented since the COVID-19 pandemic-induced market downturn, making it difficult for many investors to relate to or anticipate its depth. He warned that continued foreign institutional investor (FII) outflows, which have crossed Rs 1 lakh crore this month alone, only heighten the uncertainty. Total net sales by FIIs this year amount to Rs 2.39 lakh crore, intensifying market volatility and heightening the downside risk.

Srivastava also flagged two key levels to watch on the downside 23,700 and 23,200. Additionally, he noted that the Bank Nifty index might face further pressure, suggesting a cautious approach for those investing in financial stocks. He highlighted that a significant number of Nifty 500 stocks are now below their 100-DMA, underscoring the depth of the broader market's decline. According to Srivastava, the rally that began in March 2023 has officially lost momentum, with last week’s dip ending the upward trend that had lasted for nearly 18 months.

Market Indicators: The Relative Strength Index and Historical Trends

The 14-day Relative Strength Index (RSI), a popular technical measure for determining overbought or oversold market conditions, fell below 30 for the first time in a year, according to Bloomberg. This level is generally considered a critical threshold, indicating the market might be in oversold territory. Historically, such a dip often signals a potential bottom, but it does not necessarily guarantee an immediate reversal.

Looking to historical trends, Akshay Chinchalkar, Head of Research at Axis Securities, offered a slightly more optimistic outlook. Based on a 10-year analysis, he noted that the market tends to perform well in the 44th week of the calendar year, with an 80% chance of a rebound. The last instance of a negative close during this specific week was back in 2016. However, he also cautioned that this analysis does not change the current tactical downtrend in the market, emphasizing that while a bounce is possible, it may be temporary.

Geojit Financial, in its technical assessment, highlighted that the August low of 23,894 could act as a key downside marker. Any rebound attempt will likely face significant resistance around 24,350, indicating that upward movement might encounter headwinds. This perspective aligns with broader cautious sentiments, where any recovery is expected to be met with selling pressure as investors remain wary.

Risks in the Broader Market: Midcaps and Smallcaps in Focus

In a reflection of growing concerns, Srivastava from Indiacharts also cautioned about potential risks in the midcap and smallcap segments. He suggested that these sectors might be entering a period of correction or consolidation that could last up to two years. This viewpoint resonates with warnings from other market veterans, including Manish Chokhani, who has consistently advocated for portfolio diversification and advised against heavy concentrations in smallcap stocks.

Chokhani argued that smallcaps are especially vulnerable to sudden downturns and may face corrections of 60-80% during sharp, unanticipated market falls. His advice serves as a reminder to investors to balance their portfolios to mitigate the risks associated with these potentially volatile stocks.

Concluding Thoughts: A Market in Transition

The current market scenario reflects a complex interplay of technical levels, historical trends, and broader economic pressures. Although Nifty’s recent rebound offers a glimmer of hope, many analysts remain cautious, pointing to both local factors, like FII outflows, and global economic conditions that could weigh heavily on the Indian markets in the near future. As the broader indices continue to struggle, investors are advised to approach with caution and closely monitor technical levels, such as the 200-DMA, RSI, and key support zones, as indicators of potential trends.

With many experts like Srivastava and Chinchalkar providing a balanced view of both upside possibilities and downside risks, it’s clear that navigating the current market landscape requires a combination of technical insight and disciplined investment strategy. Investors are encouraged to stay informed, keep a close eye on critical levels, and consider seeking advice from certified experts before making any major investment decisions.

Disclaimer: The perspectives and insights shared here are those of market experts and analysts and do not represent the views or advice of FinBrook.in or its management. It is recommended that investors consult certified financial advisors before making any decisions based on market predictions.