Moneycontrol Pro Market Outlook | Is the market close to a bottom?

The Nifty index has recently experienced five consecutive weeks of negative closes.

Dear Reader,

The imposition of a 25 percent tariff on imports from India by US President Donald Trump triggered a new wave of selling in markets. As a result, India’s benchmark indices fell for the fifth consecutive week, marking their longest losing streak in two years and reflecting investors' growing concerns. This recent downturn was fuelled by a combination of factors, including Trump's tariff decisions, aggressive signals from the Federal Reserve, disappointing first-quarter earnings, and ongoing selling by foreign institutional investors (FIIs).

In terms of performance, the Nifty50 index declined by 271.65 points, a drop of 1.09 percent, while mid-cap stocks experienced a loss of 1.8 percent and small-cap stocks fell by 2.5 percent. Among various sectors, realty stocks suffered the most, plummeting by 5.7 percent, while metal stocks decreased by 3.4 percent.

FIIs continued their selling spree for the fifth week in a row, offloading stocks worth ₹20,524.42 crore during the week. The total FII sales for July amounted to a staggering ₹47,666.68 crore.

Consequently, the Indian rupee faced extended losses for the fourth consecutive week due to the continued selling pressure from FIIs and increasing oil prices. The dollar index approached the 100 mark, leading the rupee to lose 100 paise, closing at 87.52 per dollar on August 1, compared to 86.52 per dollar on July 25, after hitting a low of 87.73 during the week.

The impact of Trump's tariff was felt not just in India but across global markets, which all closed in the red for the week. US stock indexes also recorded significant losses, marking one of their worst weeks since the tariff-induced selloff in early April. Smaller-cap indexes suffered the most, with the Russell 2000 and S&P MidCap 400 falling 4.17 percent and 3.53 percent, respectively.

During this turbulent week, the Federal Reserve chose to hold interest rates steady for the fifth consecutive meeting as inflation continued to rise. However, the release of the July jobs report, which highlighted a sharply worsening labour market, instigated a selloff in US markets.

Looking ahead, the Indian markets are expected to be influenced significantly by ongoing developments related to tariffs and trade dynamics.

Indicators indicate a bottom is near

The Nifty index has recently experienced five consecutive weeks of negative closes, a trend last seen in May 2022. Despite this decline, various short- to medium-term sentiment indicators suggest that the market is currently oversold, signalling the possibility of a bounce back, if not a full-fledged uptrend. Several technical analyses point to the range between 24450 and 24500 as a significant support zone for the Nifty index.

Typically, the index finds its bottom during an uptrend when the 20 Advance/Decline (A/D) ratio indicator dips near a certain threshold. However, during downtrends, the index often displays a positive divergence before making a substantial recovery in the short term.

Looking at the current structure of the Nifty index in the weekly timeframe, it appears we are in an uptrend. The weekly chart shows that the crucial low around 24450 is still being held, with the index trading above that level. Although the 20-day A/D ratio is slightly under the benchmark line, the index's upward trajectory suggests we may be on the verge of a turnaround. This potential shift could ultimately enhance market breadth, paving the way for more positive developments ahead.

Source: web.strike.money

The market-wide Open Interest Put Call Ratio (OI PCR), measured over a nine-month average, serves as a valuable tool for identifying short-term market peaks and troughs. This metric can provide insights into anticipated price movements lasting from one week to four weeks.

In scenarios where the Nifty index is experiencing an upward trend, the OI PCR usually reaches its lowest point near a designated red line on the chart's downside. However, during periods of medium-term correction in the Nifty index, a notable positive divergence can be observed at the first lower threshold, often signalling a potential bounce back in the short term.

Currently, with the Nifty index generally trending upwards, its position near the oversold zone or first downside line supports the possibility of a short-term turnaround. This positive outlook hinges on the index maintaining its position above its medium-term support range, defined by values 24450 to 24500.

Source: web.strike.money

After the monthly expiry, FIIs initially covered some of their short positions. However, during Friday's trading session, they added shorts back into the index futures. Currently, FIIs hold short positions in index futures totaling 158,184 contracts.

While this figure is not as low as the 200,890 contracts seen in February 2025, the percentage of long positions in these futures has slipped to 8.60%. Notably, the lowest recorded percentage was 7.75%, which occurred on March 22, 2023.

This current reading marks the second-lowest level of FII long positions in index futures on record. As the Nifty index hovers around its medium-term support zone of 24450 to 24500, combined with the extremely low FII long position, the market may be on the verge of forming a significant medium-term bottom.

However, confirmation of this bottom will only occur if the Nifty index manages to close decisively above the 25250-25300 zone. Given the extreme readings, we could anticipate at least a short-term bounce reaching up to the 25250 – 25300 zone, provided that the support level holds firm.

Source: web.strike.money

Sector Rotation

Nifty 50 – The Benchmark Index ended lower by -1.09% this week and closed at 25535.

Weekly RRG:

Weakening Quadrant: Nifty Bank, Nifty Financial Services, and Nifty Private Bank were showing improvement in momentum, but this week's momentum has stalled, and relative strength has deteriorated, which is not a good sign.

Lagging Quadrant: Nifty FMCG has seen improvement in momentum as well as relative strength. If this trend continues, it may move towards an improving quadrant in the forthcoming weeks.

Improving Quadrant: Nifty Pharma and Nifty Consumer Durable continue to gain momentum and relative strength. However, the Nifty IT index's momentum continues to weaken this week, which is not a good sign.

Leading Quadrant: Nifty Media, Nifty Metal, Nifty Realty, Nifty Energy, Nifty PSE, Nifty Oil & Gas, and Nifty Infrastructure indices momentum continues to see falling momentum, hinting towards weakness in the forthcoming weeks. Nifty MNC is the only index that is witnessing increasing momentum and relative strength. Nifty PSU Bank has seen a downtick in momentum this week. This can be an early signal of a potential weakness in the forthcoming weeks.

Daily RRG table:

Weakening Quadrant:  Many sector indices like Nifty Consumer Durable, Nifty FMCG, Nifty MNC, Nifty Metal, and Nifty Bank are in the weakening quadrant this week, and all of them are seeing a loss of momentum and relative strength. There is a very minor uptick in the momentum of Nifty FMCG and Nifty Bank, but watch out for these sectors in the near term. If the uptick in momentum continues, then these sectors can outperform in the forthcoming trading session.

Lagging Quadrant:  Nifty PSU Bank has entered the lagging quadrant in Friday’s trading session and is rapidly losing momentum and relative strength. Nifty Realty, Nifty Infrastructure, Nifty PSE, Nifty Energy, Nifty Oil & Gas, Nifty IT and Nifty Media are also witnessing a loss of momentum and relative strength, and there are no signs of a turnaround yet. Nifty Private Bank has seen a marginal uptick in momentum, but it is too early to call a turnaround.

Improving Quadrant: There are no indices in the improving quadrant.

Leading Quadrant: The Nifty Financial Services index is gaining relative strength, indicating that this index is outperforming the benchmark index. Nifty Pharma and Nifty Auto are in the leading quadrant, but they are witnessing a loss of momentum and relative strength. If this trend persists, then these indices can enter the weakening quadrant in the forthcoming trading sessions.

Stocks to watch

Among the stocks expected to perform better during the week are Fortis, HDFC Bank, HDFC AMC, Torrent Pharma, Eternal, TVS Motor, Amber, Indigo, Delhivery and Paytm.

Cheers,

Shishir Asthana