Charts indicate overstretched market

For the next few days, the Nifty may open on a positive note and continue the rally. On the upside, if the index trades above 24412, it can test 25056 sooner or later. As the index is showing extreme overbought condition, stay cautious. The index may witness impulsive declines, which may trigger bigger losses

NegativeMarket Breadth :

•  No weaksignals in long-term charts
•  FIIs bought Rs16,943.37 cr
•  DIIs bought Rs8,888.87 cr
•  Monthly RSI in extreme zone
•  India VIX is down by 17.39% 

The indices began the week with a negative tone and traded with high volatility on a Budget day. NSE Nifty traded in 786.95 points or 3.17 per cent range and finally closed with 303.95 points or 1.24 per cent gain. BSE Sensex is up by 0.90 per cent. Nifty Midcap-100 is up by 3.33 per cent and the Smallcap-100 advanced by 2.48 per cent. On the sectoral front, Nifty Pharma is up by 5.77 per cent, and Media gained by 5.74 per cent. The Nifty Auto is also up by 5.16 per cent. Bank Nifty is down by 1.86 per cent, and FinNifty has declined by 1.19 per cent. The Market breadth is mostly negative. The FIIs bought Rs16,943.37 crore, and the DIIs bought Rs8,888.87 crore worth of equities this month. The India VIX is down by 17.39 per cent to 12.24. Nifty registered a new high closing with a massive recovery of 786 points from the budget day low. Last week’s bearish candle, Shooting Star, failed to get confirmation for its implications. Importantly, the volumes were higher in the last seven weeks. The index registered eight consecutive positive weeks. It also negated the bearish engulfing and two Doji candles’ negative implications on a daily chart. Interestingly, all the bearish patterns are failing to get confirmations. The Nifty gained by 3573.35 points or 16.79 per cent from the Election Results day (June 4). This massive rally is impulsive in nature and has a short duration of consolidations. Out of all the consolidations, the previous trading sessions were the longest ones. Normally, the swings and the bases are limited to 8-10 days.

After May first week, the index did not close below the prior week’s low, which is 11 weeks long. This shows an extended rally. During this rally, the 10-week average acted as a support. The index underwent high volatile on event risk days on the Exit poll, Election Results, and the Budgets. Every decline attracted fresh buying interest. Last week’s heavy volume confirms the buying interest or an accumulation. There are no weakness signals on the long-term charts. But, concerns remain on several fronts.

The index has been moving above the weekly Bollinger bands on a weekly chart and closed above the bands on the daily chart. This is an indication of the overstretched market. The Monthly RSI is in the extreme zone, above 81.01. Historically, when the RSI reached the above 80 zones, the market witnessed Category-2 corrections of above 13 per cent. The index also witnessed the corrections of above 13 per cent every two years. The index has not been witnessed after November 2021- June 2022. So, the two-year cycle is due.

As stated above, the index has failed to get the confirmation for bearish patterns for the past few months. So, the confirmation for the reversal will arrive when the index closes below the prior week’s low. It also must close below the 10-week average of 23,794 points, which is a thousand points away. The previous week’s low is at 24,074. This 24,074-23,794 is the medium to long-term support. For the short term, if the index closes below the 20DMA of 24,412 points, it will be negative. As long as these supports are protected, ride the trend.

Fundamentally, the earnings are mixed. Nifty PE has reached a three-month high and is near the two-year high. The five-year average PE is at 25.41, and the current PE is at 23.40. This data point shows that the market is not in the fair value zone. Once the earnings season is completed, we will be able to come to a conclusion about the valuation.

For the next few days, the Nifty may open on a positive note and continue the rally. Our target of 24,770 has already been met. On the upside, if the index trades above 24,412 points, it can test 25,056 sooner or later. As the index is showing extreme overbought condition, stay cautious. The index may witness the 4th of June and 23rd of July kind of impulsive declines, which may trigger bigger losses.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)