Warning bells for small-cap bulls as Nifty Smallcap index witnesses head and shoulders pattern breakdown!

Recently, the rising geopolitical tensions, soaring inflation, and the current ongoing assembly polls have spooked the markets. As a result, Nifty Smallcap index has relatively underperformed Nifty as well as the mid-cap index.

Over the last couple of years or so, we have witnessed increased retail participation in the stock markets, causing a good amount of money flow into the small-cap stocks. The small-cap index has not disappointed retail investors over the last two years, enabling Nifty Smallcap index to jump 60 per cent, Nifty Midcap index to gain 42 per cent, and Nifty index to advance 41 per cent. So, from the above data, it’s clear that Nifty Smallcap index has outperformed Nifty Midcap and Nifty index by a wide margin. The saying ‘all good things come to an end’, turned out to be true for the small-cap index.    

Recently, the rising geopolitical tensions, soaring inflation, and the current ongoing assembly polls have spooked the markets. As a result, Nifty Smallcap index has relatively underperformed Nifty as well as the mid-cap index.   

On a YTD basis, Nifty Smallcap index is down by 8.92 per cent while Nifty and Nifty Midcap index has plummeted 1.55 per cent & 5.39 per cent, respectively. In the last one month, Nifty Smallcap index is down by a whopping 13.67 per cent while Nifty and Nifty Midcap index tumbled 6.41 per cent & 9.97 per cent, respectively.   

Technically, Nifty Smallcap index, on the weekly time scale, had formed a bearish engulfing pattern as on the weekend of January 21, 2022. The formation of bearish engulfing, after a continued uprise in the market, indicates that the bullish market is becoming bearish. And, interestingly, the bearish engulfing candlestick was followed by a bear body candle on the weekly time scale. Though it had a lower shadow, it had formed a lower high and a lower low.   

At present, the index has witnessed the breakdown of probably the best known of all major reversal patterns i.e. the head & shoulders reversal pattern. On the daily time scale, the index is below its important long-term moving average i.e., 200-DMA, and also, below the neckline of head & shoulder patterns. Interestingly, the breakdown of the neckline was seen on Monday along with an opening downside gap. Furthermore, the index has marked a fresh swing low as it managed to slip below the prior swing low of November 2021.   

The ADX, which is above the level of 30 on the daily time scale, shows a strong downtrend in the index. Furthermore, the ADX line is trending higher and the -DMI is above the +DMI & ADX.