Further Uptick Likely In Overbought Zone

The benchmark index rallied for the third straight week and ended a new high. NSE Nifty gained by 1.5 per cent, and BSE Sensex was up by 1.22 per cent. The broader market indices continue to underperform. The Midcap gained by 0.29 per cent and the Smallcap down by 0.47 per cent. Metal is the top gainer with 7.02 per cent, followed by the auto index at 4.61 per cent. On the flipside, the Private Bank index was down by 0.38 per cent, and FMCG declined by 0.04 per cent. The market breadth is positive throughout the week. The India VIX declined by 6.54 per cent to 11.96. The FIIs bought Rs22,403.72 crore, and the DIIs bought Rs24,211.50 crore worth of equities.

The Nifty continues to scale new highs. The Nifty rallied by 249.85 per cent from the Covid-2020 low. The current bull run since March 2023 is the sharpest one, with no major corrections. In the last 18 months, the benchmark index has climbed over 56 per cent. During this period, only one of 6.85 correction occurred in October 2023. Currently, India’s market capitalisation (mcap) has risen to $5.71 trillion.

In any terms, the current market condition is in a strong bullish trend. In any time frame, there is no weakness is visible. Several evidence show the trend is overstretched. However, all smaller declines were taken as opportunities for fresh buying. Several bearish patterns failed to get confirmation for their implications. The seasonality of September’s weakness for the past 15 did not repeat this year. The index has closed above the prior bar’s high in the last four months and three weeks. This shows the solid strength in the trend. Interestingly, the volumes have been declining for the last three months.

We mentioned a year ago that the Nifty can test 26,276 by the first quarter of FY 2025-26. This target is a 100 per cent extension of the March 2020 to October 2021 swing. This first phase of the rally is 19 months old. After 20 months of consolidation, the index broke out and has now exactly met (26,277) its target on Friday. It has met all pattern targets and is in uncharted territory. The uptrend remains very strong and shows no signs of weakness or retracement. If the declines are limited to less than five per cent and the buying interest continues, the index may test 27,652 by January 2026. Before that, the 26,500 and 27,000 will be the immediate resistance.

However, the Nifty is now 7.66 per cent above the 20-week average. Earlier, when it deviated by 8 per cent during December 2023, the index traded sideways for at least seven months. This has led to the weekly Bollinger bands contraction and the mean reversion. Sooner or later, the index must witness a mean reversion. The daily Bollinger bands also expanded to the maximum, and the index is now 725 points above the 20DMA, which is the mean.

The monthly RSI (83.92) has been in the extreme zone (above 80) for the last three months. The weekly RSI (76.75) and the daily RSI (76.44) are also in the extreme overbought condition. Earlier, when the RSI reached near the 80 zone on the weekly time frame, it developed a negative divergence and resulted in a significant correction. The monthly MACD line is at an all-time high and, far away from the zero line, is an indication of extremely overbought. In any case, a profit booking starts and declines below 25,847 points, which will be painful. Like the rallies, the declines also will be a sharper one.

As mentioned earlier, the FMCG, Auto, and IT sectors outperformed and hit a new high. These sectors continue to outperform. Consumer durables have entered into the leading quadrant in the RRG chart and may outperform. The Realty and Metal indices are picking up their relative strength and momentum. Many stocks in these sectors are near their pivots. Watch them for a buying opportunity. The PSU Banks are still lagging. Though Bank Nifty is at a lifetime high, its relative strength and momentum are declining, so stay cautious in this sector. The profit booking in private sector banks may hurt.

In a nutshell, the trend is stronger, and there is no option to ride it. A stop loss always protects us from the losses. We can’t with zero positions in the market. Select stocks that are breaking out of the solid weekly bases and have higher relative strength. The upside may be limited or may continue to rally to the new highs. We can only control the risk. The earnings season will begin in the next two weeks. The earnings momentum must continue to sustain the trend intact. Any major disappointments will dampen the sentiment and result in a withdrawal from the market.

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