'Death Cross' over Nifty; downtrend in the offing

Selling by FIIs in cash and F&O to keep benchmark under pressure

Forecasting is a dangerous business, especially on equity markets. Wise strategists believe investors must not concern themselves with the near term but when there is no clarity on what the future holds, as is the case with Indian equities, technical charts are the only fallback option. There are several oscillators that technical chartists use to determine how the market will behave. Currently, all these show a negative trend. For now, the bull market is over.

Technical experts use moving averages to determine the direction of the market. A popular one is the ‘Death Cross’. A Death Cross forms when the 50-day moving average of the closing prices of an index goes below the 200-day moving (long-term) average.

This event is considered by some to indicate the end of the “up” trend and the start of the new “down” trend (a “bad” market condition), explains Dharmesh Patel, technical analyst at Emkay Global.

As a theory, Shrikant Chauhan of Kotak Securities believes, the Death Cross works well as does the other momentum oscillator called the Relative Strength of the Index. According to Chauhan, over the last three days, there has been a negative cross-over. This coincides with foreign institutional investors (FIIs) selling in the derivative market as well. Through June and July, they were net buyers in the derivative segment but are now selling in the futures and options segment, too, since August.

The market is taking cognizance of these indicators because for long the benchmarks have stayed over the 200-DMA. However, a crash is not imminent. For the market to enter a period of long-term weakness, the Nifty has to go below the 5,400-mark and sustain at those levels.

However, experts say if the government announces measures to stabilise the rupee, foreign institutional investors would return.

Though many believe the market is in an over-sold territory, there are few triggers for a pull-back at this point. Also, the rupee’s new lows and increasing bias towards developed markets are preventing any pullback.

  According to Anand Rathi’s technical chartists, the CNX Nifty in the last 11 trading days has been making lower lows on 10 occasions and till there are signs of a pullback above 5,620 on a closing basis, the bias is likely to remain on the negative side. Despite the weakness, the benchmark Nifty is holding above its April low of 5,477. However, if this level breaks, then 5,430 or levels thereabout could be held. For any sustainable rally, the Nifty has to cross 5,560.

FIIs continue to sell in both the cash and derivative segments. According to Aditya Birla Money, FIIs continue to be sellers in the futures and options market and are unwinding their long positions. In the short-term, the Nifty could find support between 5,350 and 5,450.