As the market begins a new week, all eyes are on the potential for a rebound among the bears, particularly after the recent sharp decline experienced last Monday. Coming off a historically favorable sub-25 RSI level, many traders remain cautiously optimistic about a possible bounce-back. However, there are concerns that any upward movements may be short-lived. Let’s delve into the current market dynamics and see what lies ahead.

Market Sentiment: A Tug-of-War

Last week’s limited trading days left investors uncertain about the market’s future direction. The Nifty 50 index mirrored this indecision, resulting in a smaller trading range compared to previous weeks. Notably, Thursday’s sharp decline saw a significant drop in the number of stocks on the Nifty 500 index trading above their 10-day simple moving average (SMA).

• At the end of last week, only 43% of the Nifty 500 stocks were above this critical moving average, down from 73% the week before.
• This shift indicates growing bearish sentiment among investors.

Sector Analysis: IT vs. Defence

The Nifty IT index is currently facing challenges, having broken below the crucial 61.8% Fibonacci retracement level from its June 2024 low to December 2024 high. The monthly MACD has also dipped below the signal line, signaling potential further declines. Historically, similar downturns, like the one seen in April 2000, have resulted in significant drops, highlighting vulnerabilities in major tech stocks such as Infosys, Wipro, HCL Tech, LTIMindtree, and Tech Mahindra.

On the other side, the defence sector shows signs of resilience, with many stocks having corrected over 50% from their July peaks. Heavyweights in this sector are starting to solidify a base, suggesting a potential reversal. Key players like Bharat Electronics, Mazagon Dock Shipbuilders, and Hindustan Aeronautics could be primed for an upward movement, as their average 14-day RSI stands around 45, indicating room for growth.

Nifty Outlook: Earnings Season Ahead

Entering the new week, the market may find a silver lining in the upcoming earnings season. Historically, weak entries into earnings periods have offered a launching pad for gains, provided that corporate earnings meet expectations.

• Over the past decade, 80% of the time, the Nifty has achieved approximately 3% gains in the three to four weeks leading up to the start of Q4 earnings.
• Interestingly, the first month of earnings has shown an average return of -0.18%, but the subsequent three months have typically yielded around 8% gains.

With hopes riding on reaching the 23,000-23,500 range, it’s crucial to monitor the market closely, especially after last week’s MACD crossover. The current situation bears resemblance to the rebound witnessed in August 2019, both in terms of magnitude and duration.

Potential Price Levels to Watch

Despite the recent pullback, a W pattern is forming on the hourly chart, indicating that the corrections may be nearing an end. Key levels to watch for confirmation of a breakout include:

• 22,319: The bottom of the W pattern.
• 22,587: The 20-day SMA.

Even after last week’s steep decline, the market avoided a piercing candle, providing a solid foundation for a continuation of gains.

In conclusion, while the market grapples with uncertainty, the potential for growth remains. As the earnings season approaches, both traders and investors should stay vigilant and ready to adapt to changing market conditions.

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