Avoid highly leveraged positions
Any further rally will attract profit bookings; It is better not to chase at the higher levels
A move below Friday’s low of 23,985 will be a weaker sign. The 8EMA support is at 23,758 points, which is the nearest support. Below this level, the 20DMA is at 23,322 points, which is the strongest support now. In any case, if the index fails to close above the 24,175-335 zone
NSE Nifty scaled a new all-time high and ended above the 24,000 level. The Nifty traded in a massive 824 points range and closed with 509.50 points or 2.17 per cent gain. The BSE Sensex was up by 2.36 per cent. The Midcap-100 and Smallcap-100 underperformed with just 0.56 per cent and 0.45 per cent gains. On the sectoral front, Nifty Energy is the top gainer by 3.29 per cent, followed by 2.73. Reliance Industries, gained by 7.56, contributed a majority to the rally. On the flip side, Nifty Realty is down by 2.40 per cent, and the Media index declined by 2.32 per cent. The market breadth is primarily negative as the declines outnumbered in three sessions. The India VIX is up by 4.72 per cent to 13.80. After selling in the first half of the month, the FIIs turn net buyers by the end of the month. They bought Rs2,037.47, and the DIIs bought Rs28,633.15 crore during the last month.
The unstoppable rally in the equity benchmarks indices has reached an overextension zone, a potential red flag for investors The Nifty has formed a strong bullish bar last week, engulfing the prior week’s range and forming an outside bar. Over the previous four weeks, the index has been closing above the Bollinger bands, which is a crystal clear overbought condition. Now the index is 6.25 per cent above the 20-week average and 4.75 per cent above the 10-week average. Such a significant deviation from the averages is a sign of an overextension of the rally, which could pose risks for investors. The weekly RSI (72.37) is also in the overbought condition, further indicating potential risks.
On a daily chart, the Nifty formed a bearish candle on Friday after four symmetric bullish candles. In all trading sessions in the last week, the index has moved over the 200-point range. The index is 2.95 per cent and also 700 points from the 20 DMA. The upper Bollinger band’s vertical expansion shows the impulsive nature of the rally. The daily RSI is reacting from the near 70 zone. The daily MACD histogram also shows a negative divergence, which is more valid. The upper Bollinger bands level of 24,338 may act as crucial resistance now.
In these conditions, any further rally will attract profit bookings. It is better not to chase at the higher levels. A move below Friday’s low of 23,985 will be a weaker sign. The 8EMA support is at 23,758 points, which is the nearest support. Below this level, the 20DMA is at 23,322 points, which is the strongest support now. In any case, if the index fails to close above the 24,175-335 zone, the probability of counter-trend consolidation before the budget is the highest possibility.
In a nutshell, for next week it is important to be very specific about the new purchases. Focus on the high relative strength stocks. The IT and FMCG sector indices have improved their relative strength and may outperform next week. It is better to be cautious about PSE and CPSE stocks. It advised to avoid highly leveraged positions. Stay cautious at higher levels, any kind of profit booking may hurt.
(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)