A rise in crude oil prices, amid fading hopes of a near term US Iran agreement, weighed on market sentiment and pushed the Nifty 50 to a weak opening. Selling pressure intensified soon after the start of trade, dragging the index below the 24,500 mark.
During the first half of the session, the Nifty slipped to an intraday low of 24,429, close to the August 4 low. Some buying emerged at lower levels, helping the index recover part of its losses. However, the rebound remained limited, and the Nifty eventually settled at 24,471.70, down 0.46%.
Nifty Forms a Bearish Candle
Tuesday's price action resulted in the formation of a bearish candle, with the index closing below its 8-day EMA. It also slipped below the 23.6% retracement level of the previous upswing from the July 24 low to the August 3 high.
However, the decline comes after a sharp 1,168 point, or 4.95%, rally in just six trading sessions. Some consolidation after such a strong move is not unusual and can help the market absorb recent gains before determining its next direction.
Flag Formation in Nifty
The immediate support is placed at 24,328, which corresponds to the 38.2% retracement level of the recent rally. This is an important zone as healthy counter trend consolidations often find support around this retracement level.
If selling pressure persists, the Nifty could move towards its 20-DMA, currently placed near 24,287. Below this, the 50% retracement level around 24,190 would become the next key support.
The 20-DMA is particularly important as the current price structure resembles a flag formation. As long as the index holds this support zone, the broader bullish structure remains intact.
What Could Restart the Uptrend in Nifty?
For the Nifty to regain upward momentum, it needs to move back above the 8 day EMA at 24,506 and subsequently cross the previous session's high of 24,576.
A sustained move above Tuesday's high would strengthen the possibility of a breakout from the developing flag and pole pattern and could signal the resumption of the broader uptrend.
Until such confirmation emerges, fresh long positions may be avoided as the index remains in a short term consolidation phase.
Momentum Indicators Lose Strength
Momentum indicators have also cooled following the recent rally. The 14 period RSI has slipped below the 60 mark, reflecting a moderation in bullish momentum.
The MACD histogram has contracted sharply, indicating that the strength behind the recent advance is weakening.
The 20-DMA at 24,287 therefore becomes an important level to monitor. A decisive break below this average would be the first sign that the momentum regained by the bulls during the recent rally is beginning to fade. As long as the Nifty holds above this zone, the current decline can still be viewed as a consolidation within the broader recovery trend.
Stock to Watch: Zydus Lifesciences
Zydus Lifesciences has broken out of a five-week base after taking support near its 10-week moving average and rebounding sharply. The breakout was accompanied by strong volumes, indicating healthy buying interest and adding credibility to the move.
The Relative Strength line has moved to a new high, reflecting the stock's outperformance against the broader market. The trend structure also remains favourable, with both short term and long term moving averages in an uptrend. The moving average ribbon continues to point higher, while the Bollinger Bands have started expanding, suggesting an increase in momentum and volatility.
Momentum indicators are also supporting the breakout. The daily MACD has generated a bullish crossover, while the RSI has moved back into the bullish zone. The KST is close to generating a bullish signal, and the Stochastic RSI continues to remain positive. The Elder Impulse System has also printed a strong bullish bar, further strengthening the technical setup.
Overall, the stock has confirmed a breakout from its recent consolidation. A sustained move above Rs 1,200 can keep the momentum positive and open the way towards Rs 1,285. If the stock sustains above Rs 1,285, the next upside level to watch is around Rs 1,340. A stop loss can be maintained at Rs 1,112.
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