Nifty50 Down, But Is It Out?

In the two months that the market has moved sideways, we witnessed a shift in sectoral leadership as well. From Financials, Industrials, and Energy leading the rally, we saw Metals, IT, and FMCG taking the baton and running forward. This right here is the sign of a healthy market. Sector rotation is the lifeblood of a bull market.

So what happened today? Nifty corrected by 3.53% while Mid- and Small-caps were down 5.68% & 5.55% respectively. Sure, that is a relatively steep correction for a single day.

But has that changed the underlying trend? Not really.

Should you be worried? Only if the risk management system is not in place.

Take a look at the chart below. The index has been moving in a defined range between 15,500 & 14,300. Nifty has halted just a few points above its support. But despite this move, the trend hasn't been altered, certainly not yet.

In terms of an intermediate trend, a breach below 13,600 would be the level that could cause some damage. That would be the first indication of a lower high lower low- Dow theory comes into play everyone! So what we're looking at right now is a correction, sure. But a short-term correction. This is normal market behavior.  Abnormal market behavior would be a non-stop rally, without a pause. That would be more of a cause for concern.

Short-term corrections help establish the trend. This is how swing lows are formed. How else would we evaluate a pattern based on higher highs higher lows?

Click on chart to enlarge view.

What's interesting is that Bank Nifty has been hinting at this for a little while. Take a look at the chart below. We've shared this chart in our conference calls before. Bank Nifty has been the leading indicator among Financials across the globe with regards to an impending correction. The same bearish divergence played out in early 2020 as well. This along with other signals forewarned us about the fall that was to follow.

So what's different this time around? The weight of the evidence. There are very few signals indicating further weakness compared to what was the case last year.

Considering that we look at long-term charts more often and keep the bigger picture in mind, one-day drops such as the one we saw today do not account for a major signal until more evidence points towards a weakening market sentiment or until more such days unfold one after the other.

Hold on to your risk management levels and follow the system. That is the only way to weather this storm!

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team