The Nifty Finishes July on a Soft Note

The Nifty 50 finished July up 7.5% but finished the last week on a sour note. The index was dragged lower by losses in heavyweights like Reliance Industries, HDFC Bank, HDFC, Kotak Mahindra. On the last day of July,  the overall market breadth was negative as 1,432 shares closed lower while 1,225 closed higher. Looking forward to August, seasonally the Nifty has underperformed after notching up gains in July. The technicals daily look tired and likely point to short-term consolidation, after the shares rocked higher during July.

The Seasonals

The seasonal returns for the Nifty are generally positive in July but generally underperform in August. Over the last 10-years, the Nifty-50 index has been lower 50% of the time for an average loss of 1.4%. This compares to July when the Nifty 50 index is generally higher 60% of the time for an average gain of 1%.

Technical Analysis

The Nifty-50 has rebounded sharply after declining by 40% in March. CFD trading on the nifty-50 has increased and has surpassed the 61.8% retracement level and has recaptured resistance which is now considered support near the 50-week moving average at 10,899. Resistance is seen near the all-time highs in the index seen near 12,430.

The daily chart shows that prices have closed through support near the 10-day moving average. This has been a good gauge of the movement of the index since it rebounded in March. While a close below this level is somewhat concerning, the index has hugged this target since April and is unlikely to move away from this level.

Medium-term momentum remains positive as the MACD(moving average convergence divergence) index generated a crossover buy signal in July. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses above the MACD signal line (the 9-week moving average of the MACD line). The MACD histogram is positive but appears to be decelerating. This could foreshadow a topping pattern. The MACD histogram is printing in the black with a slowing trajectory which points to consolidation.

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The daily MACD is showing a different scenario which could be an issue over the short-term. The MACD line generated a crossover sell signal as the MACD signal line crossed below the MACD line. This sell signal points to accelerating negative momentum.

Short-term momentum is turning negative. The fast stochastic generated a crossover sell signal in overbought territory. The current reading on the fast stochastic is 96, well above the overbought trigger level of 80, which could foreshadow a correction.

The daily fast stochastic plowed through the overbought trigger area after generating a crossover sell signal. The movement below this level reflects accelerating negative momentum.

The daily RSI (relative strength index) which is a momentum oscillator that measures accelerating and decelerating momentum, moved through the overbought trigger level, which reflects accelerating negative momentum. The weekly RSI is stuck in the middle of the neutral range which generally reflects consolidation.

The Bottom Line

The upshot is that while the Nifty-50 has delivered amazing returns during July, it ended the month on a sour note. The technicals point to a short-term correction, but the move in the index is unlikely to veer far away from the 10-day moving average. While short-term momentum is negative, support levels are not too far away. The seasonal for August are mildly negative for the nifty-50, which does not bode well for robust returns following a stellar month in July.

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