The benchmark index has been taking a serious hit over the last two sessions. After the index breached its August 2022 high and everyone became bullish, the bearish divergence that formed at the top started to play out and has been working quite well. In the last two sessions alone the index has lost about 470 points, out of which a 350-point cut was seen today.
Some might call it a healthy correction but my view is we would see a level of 17,200 in the short term. This is the same level that held the markets strongly after a severe gap down on 29 August 2022, which was a knee-jerk reaction amid Jerome Powell’s hawkish comments at the Jackson Hole Symposium. The markets briefly fell below this level but couldn’t sustain below it, hence marking it to be a strong demand zone.
Image Description: Daily chart of Nifty 50 with the RSI at the bottom
Image Source: Investing.com
Now you might think the 17,200 is too far to come in the near term. But in my experience, a successful divergence (bearish in this case) that does the job well throws the stock at least to the lowest trough in between the two divergence peaks which is around 17,200 in the current scenario. Look at the positive divergence around the 15,180 level in June 2022, when the Nifty 50 bottomed out. The nearest target of that divergence was the highest peak between the two divergence troughs, i.e. 16,800. In short, the highest/lowest level between two divergence points is the nearest level to which the stock could travel (if the divergence works).
However, before reaching this level, a zone of 17,500 – 17,400 has to be sliced through which is also a robust support level. Today also, the fall reversed from around 17,505. As long as this zone is intact, bears might have to wait to see the rate of 17,200 on the screen. Today’s fall has also breached the rising trendline support on the daily chart, which also supports the negative view.
The global markets are also not supportive. Earlier, when the US market was falling, our markets were showing quite a good strength and surpassed the previous month’s high. But this decoupling from the US markets seems to have been over. As long as we don’t get support from the US markets, it’s difficult to retrace back to September 2022 highs.
The is also indicating to heightened volatility. Today, the index rose 7.78% to 19.82 and a rising VIX generally points to a falling market.
The major trend determinant would be the US Fed’s interest rate decision on 21 September 2022. There are now expectations in the market that the Fed might even turn to a 100 basis point hike, which after 2 consecutive 75 bps hike would make the US economy closer than ever to hit a recession. Therefore the fed’s rate decision would further drive the market trend.
Although our economy is quite resilient, but if the fed again goes for an aggressive rate hike, then the pressure would mount on the RBI to be on its toes to keep up the pace of rising rates to keep the interest rate differential between the two countries as narrow as possible. This will again be a bad signal for our markets. Hence, to sum it up, it seems like the 17,200 level has a higher probability to come first.
