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A Special Note: A Look At Broader Market Charts As Market Breadth Remains A Concern

Following a brutal decline that the NIFTY witnessed beginning September 2018, the index found its support just below 10,000 mark and witnessed a technical pullback. This technical pullback halted near 10950 level in early December 2018. Since then, for next two months, the index has resisted multiple times and has remained unsuccessful to move past this level.
 
While we attempt once again to go near this level and make efforts to take out this immediate and important resistance area, we need to take a hard look at what it will take for the markets to give a sustainable breakout above this point.
 
Whenever any market attempts a breakout, it requires strength and all-round participation (at least larger participation) to make it sustainable. At this point, Market Breadth comes into picture. Market breadth is a technique used in technical analysis that attempts to gauge the direction of the overall market. Market breadth indicators analyze the number of companies advancing relative to those declining. Rallies that have higher number of stocks participating are often known to sustain for a longer duration.
 
While we speak of the overall health of the market or the sustainability of any anticipated breakout, a look at the market breadth of the market is required the contribution to the breadth comes from the Broader Markets. A close look at $CNX500 Index which represents the broader market throws up some interesting insights.


CNX500 Index, with 501 stocks as its constituents, represents over 95% of the free float market cap.

 

The chart shown above is the daily chart of CNX500 index. After marking a double top near 10,000 and subsequent corrective move, the index rebounded from just below the 8400 mark, the index made higher bottoms but presently it is seen trapped in a narrow range in a symmetrical triangle formation. A strong move would occur only after the index moves out of this range and after the 200-DMA of 9061 is taken out.

 If we zoom out and take a larger view through weekly chart of CNX500, it presents similar story.

In a similar formation, the index is seen marking a double top near 10,000 level, and then looks trapped in a pattern post a corrective decline. On the weekly time frame, the index is seen resisting to 50-Week Moving Average which is presently at 9205. This moving average has almost become a proxy trend line for the index.
 
The levels of 9205 (50-Week MA) and 9228 (200-Day MA) are the levels that the CNX500 index need to take out. Once these levels are taken out, we will see all future up moves having wider participation of stocks. This will lead to improved market breadth and makes up-moves healthy and sustainable as and when they occur.
 
Until this happens, we will see up-moves, if any, coming with fractured breadth and this might make sustaining such up-moves difficult and is likely to keep markets highly stock specific.

Milan   Vaishnav, CMT, MSTA,
Consulting Technical   Analyst
Member: (CMT Association, USA | CSTA,   Canada | STA, UK)  | (Research   Analyst, SEBI Reg. No. INH000003341)

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