Weekly MACD Signals Overstretched Condition

Protecting the profits at higher levels should a top priority. Concentrate on high relative strength stocks for fresh entries

NSE Nifty scaled a new lifetime high with a surprise move on Thursday. With a broader market participation, the index gained by 2.03 per cent. BSE Sensex was also up by 2.13 per cent. All the sectoral indices closed in the positive territory. The FMCG is the top gainer with 2.99 per cent, followed by the Nifty Private Bank index with 2.95 per cent. The Media index also advanced by 2.84 per cent. The India VIX is down by 17.53 per cent to 12.55. The FIIs bought Rs14,236.06 crore, and the DIIs bought Rs5458 crore worth of equities this month.

For the third consecutive week, the Nifty hit a new lifetime high. On Thursday, in a surprising move, it rallied over 500 points from the day’s low and closed at an all-time high. The volumes higher than the previous week show buying interest. All sectors and broader market participation are big positives at the new high. During the week, the index made higher lows and broke a 9-day base. It formed a bullish engulfing candle on a weekly chart and erased all the implications of the previous week’s bearish engulfing. Back-to-back outside bars show increased trading ranges in a week. In this background, the index does not have any weaker signs now.

However, there are concerns about the trend. The index deviated from the mean averages. Now, it is almost over 3,000 points, or 13.58 per cent, away from the 50-week average. The weekly Bollinger bands have expanded to the maximum. In normal conditions, the price tries to be closer to the mean average, and when it deviates, it will come back to the mean average.

At the same time, the Weekly MACD, which is far away from the zero line, is a sign of an overstretched condition. The weekly RSI is also in the overbought condition. With the recent consolidation, it came down from an extreme zone. It developed bearish divergences in daily and weekly timeframes. These situations may impact the trend’s strength sooner or later.

The 10-week average has been acting as strong support for the past few weeks, currently at 24,776. The last Monday’s low is also at 24,753. For the near term, this level is crucial for sustain the trend. Unless, the Nifty forms a lower low below this 24753, the uptrend is intact. Before this, the 8EMA of 25,153 points, and the 20DMA of 25,027 will act as short-term supports. Any decisive close below 24,753 points, with additional distribution days, will lead to a deeper correction.

There is not much change in the RRG charts. The Nifty IT, Pharma, FMCG, and Consumer Durable indices are in the leading quadrant. The oil and gas index is entered into the leading quadrant. These sector stocks outperform the broader market for some more time. The Auto index is in the Weakening quadrant and may underperform. The PSU bank index is improving its momentum in the lagging quadrant; watch the stock-specific activity.

In a nutshell, the trend is strong and intact. But it is the time to be cautious as the market is deviated from its mean averages. Protecting the profits at higher levels should a top priority. Concentrate on high relative strength stocks for fresh entries.

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