Indian investors would have been rattled by the extremely traumatic week that went by, perhaps one of the worst in recent times. The large downward gaps formed on Thursday and Friday, and the extremely weak close for the week, indicate that it will be a struggle for the market to regain momentum in the near term.

There are many obvious factors causing the current slide — a rapidly sliding rupee, soaring crude-oil prices, balance of payment threatening to turn negative, FPIs turning net sellers and increasing treasury yields in the US with Fed tightening.

But Indian benchmark indices had been edging higher through most of 2018, despite all the negatives, buoyed by flows from domestic mutual funds. This had induced a sense of complacency in Indian investors.

This situation has prevailed since February 2016, with the Sensex and the Nifty in a gravity-defying bull market, tempered with ephemeral corrections.

The steep fall in the past couple of weeks would, therefore, have come as a unpleasant surprise to most.

But corrections that are quite ugly and continue for many months are quite common in stock markets. To qualify as a serious medium-term correction, the index needs to fall more than 20 per cent from its recent peak, or the correction needs to last more than six months. For instance, the slide from November 2010 lasted 14 months and resulted in a decline of 28 per cent from the peak. Similarly, the fall in 2015 lasted 12 months and resulted in a drop of 25 per cent.

The decline so far in 2018 has corrected only 12 per cent and has lasted just two months. This means the correction needs to get deeper, or last a few more months, to qualify as a serious medium-term correction.

If there is an about-turn in the next week or so, we will have to assume that the medium-term peak has not yet been recorded, and the index can move in a sideways band at higher levels for a few more months.

It can be argued that the broader market has been in a deeper correction since February, and that the indices do not reflect the true picture.

In that case, we will have to watch the extent of this correction to understand if the market is undergoing a structural change due to excessive demand, which results in much shallower corrections in the Sensex and the Nifty, than warranted.

Nifty (10,316.4)

The Nifty 50 has recorded five consecutive weeks of down-closes. The short-term trend has definitely reversed lower and the medium-term trend is on the verge of reversing downward.

Medium-term trend : It is now obvious that the final or the fifth leg of the up-move from the February 2016 low of 6,869 ended at 11,751 in September.

The first medium support that needs to be watched now is the March 2018 low of 9,951, and the 38.2 per cent retracement of the entire move from 6,869 — which occurs at 9,900.

So, investors need to watch the support zone between 9,900 and 9,950 carefully. If this zone holds, there is a likelihood of the index trying to move towards the peak of 11,751 once again in the coming months.

But a break through the above-mentioned support zone will mean that this is a correction of the up-move from the 2013 low. In this case, the index could fall up to 9,200 or even 8,800.

The long-term trend will not be adversely affected as long as the index manages to hold 9,200. We will review the counts again after two to three weeks, as we get more clarity.

If the market shakes off the gloom next week, if the rupee strengthens to 72, and if Trump turns a new leaf and calls off the trade war with rest of the world, the index could move towards 11,751 again, and the outer target for this year —– 12,300 — will come into force again.

Short-term trend : A rebound is possible early in the week. This rally can face resistance at 10,560 or 10,750. Downward reversal from either of these levels will offer an opportunity to go short. The short-term trend will turn positive only on a strong close above 10,840.

Supports for the week, if the slide continues, are at 9,921 and 9,713.

Sensex (34,376.9)

The Sensex, too, appears to be in a deeper correction that is re-doing the entire up-move from the February 2016 low.

Immediate support for the index is at 32,500. This coincides with the low formed in March 2018 and falls at the 38.2 per cent retracement of the rally from the 2016-low.

The medium-term trend will be threatened only if the index closes below this 32,500. Next support is in the band between 30,000 and 30,500. The long-term trend will be under a threat only if the index goes on to close below 30,000.

The Sensex has short-term support at 34,300, near the levels at which it closed on Friday. A rebound from here can take the index to 35,130 or 35,683 in the near term. An inability to move past these levels will be the cue for short-term traders to initiate fresh short positions.

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Short-term trend will turn positive only if the index manages to close above 35,911.

The two large gaps formed on Thursday and Friday need to close before the short-term outlook turns better.

Bank Nifty (24,443.4)

The Bank Nifty has an immediate support at 23,605 and then at 22,740 if the down-move continues.

The short-term trend will turn negative only if the index goes on to record a strong close below 23,605.

Immediate resistances for the index are at 25,864 and 26,794. Reversal from either of these levels will be the cue to take short positions. The short-term trend will turn positive only if the index manages to close above 26,794.

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