How Low Can We Go?

First, let's look at the Nifty 500 which confirmed a failed breakout and bearish momentum divergence by closing back below 10,000. Prices have since moved back towards support at 9,550. Below that level, there are potential areas of support at 9,075 and 8,700.

Structurally, this index remains in a sideways range so we have to prepare ourselves for the possibility that if things deteriorate further under the surface then we could revisit the lower end of its range...roughly 10% lower.

Click on chart to enlarge view.

Here's the Large-Cap Nifty 50 closing decisively back below 12,100. If prices are below that level then our downside risk is towards 11,125 and 10,600.

Here's the Nifty 100 closing below 12,050. Below that our risk is down towards 11,250 and 10,750.

The bearish to bullish trend reversal in Mid-Caps remains intact as long as prices are above 16,000, leaving plenty of room for backing and filling without sounding the alarm of a much steeper decline to come. With that said, a move down towards 16,000 is roughly 9% so from a tactical perspective there remains plenty of risk at current levels.

Small-Caps also confirmed a bearish to bullish trend reversal over the last several months and that would remain intact as long as prices remain above former support/resistance near 5,700. Below that then our bullish structural thesis towards the group comes into question.

Bottom Line: We don't know how steep this correction is going to be, but as long as we're below the levels outlined above in the Large-Cap and Nifty 500 indices, then there remains a lot of downside risk and opportunity cost in owning stocks in the near-term despite our long-term bullish outlook for Equities as an asset class.

If you have to own anything, we prefer names owning names showing relative strength like Gujarat Gas and avoiding those showing relative weakness like Havells India Ltd. and Indiabulls Housing Finance.

Where these indexes do begin to find their footing and how they far they're able to rally before sellers come back in aggressively will tell us a lot of information about how these next few months will play out. For now, patience remains best as we hone our list of the strongest names that we want to be buying as attractive reward/risk entries emerge.

If you enjoyed this post and want access to all of our premium research, start a 30-day risk-free trial or sign up for our "Free Chart of the Week" to receive more free research like this.

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

Allstarcharts Team