The month of August saw the index take a momentous leap forward, while September has proved to be exactly the opposite. Deteriorating Nifty breadth and inability of the index to surpass the confluence of hurdles placed around 11,600 eventually led to a sharp decline in this week's trade.
The index's breadth had been waning since last week of August (ie percent of the Nifty constituents trading above 50-DMA had been on a declining spree from 92 percent). In September, the Nifty on umpteen instances faced resistance around three-digit Gann number of (116)00, when a supply zone is not pierced despite several efforts, it eventually translates into a strong hurdle. So, despite a strong recovery move of over 2 percent on September 25, the Nifty still registered a weekly decline of 4 percent and is now facing multiple overhead resistance for the first time since July 2020.
Thanks to Friday's bullish candle, the Nifty has managed to defend the midpoint of its current three-digit Gann channel (i.e. 10,850). Oversold nature of short-term breadth also aided the recovery. However, the presence of confluence of hurdles on the benchmark index is likely to keep the excitement short-lived.
The recent strength in the dollar index has played a spoilsport across Emerging Markets (EMs). Following a corrective move, the dollar index formed a short-term bottom and consolidated eventually tearing above the 93.7-mark.
Simultaneously, EMs formed a topping out structure and staged a reversal. Historically, weakness in the dollar tends to attract outperformance of EMs and strength in the index leads to underperformance of EMs (in play since last few sessions). A further appreciation in the dollar Index towards the 95.50-96 mark could see a continuation of the weakness in EMs.
Meanwhile, losing around 10 percent this week, the Nifty metal index has been trending lower for the entire month, which has coincided with the rise in the dollar index and decline in MSCI EMs. Resistance around the long-term downsloping trendline and 100-SMA on the weekly chart has been acting as a massive hurdle for the Nifty metal index.
The much beleaguered Bank Nifty was among the major movers in Friday's trade as it found support around the midpoint of the entire move from March low to August high and rallied by 2.6 percent. Positive column reversal is seen on point and figure (P&F) chart, the weekly ratio chart of BankNifty/Nifty is approaching the lowest level of the last seven years. Some pullback is plausible after such underperformance. However, it is too early to term it as a reversal or turnaround.
Within the broader markets, the Nifty 500 index has seen a reversal in fortune in September. For the week, it lost around 4 percent. However, a bearish divergence in the ratio chart of Nifty 500/Nifty undermines structural weakness in the Nifty 500. During pullback rallies, staying away from broader markets would be the right approach.
(Pritesh Mehta is the Lead Technical Analyst-Institutional Equities at Yes Securities.)
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