Charts indicate losing steam in rally

The equities continue to have positive momentum and hit new highs last week. NSE Nifty gained 115.15 points or 0.51 per cent. The BSE Sensex is up by 0.51 per cent. The broader market indices lost momentum. The Nifty Mid-cap is up by 0.36 per cent, and the Small-cap index is down by 2.18 per cent. The PSU Bank index continues to rally by 3.68 per cent. The Pharma and Metal indices are up by 1.98 per cent each. The Nifty Media and IT indexes are down by 1.56 per cent and 1.11 per cent, respectively. In this month’s last six trading sessions, the FIIs bought Rs10,128.15 crore, and DIIs bought another Rs13,898.99 crore worth of equities. The market breadth was negative except on Thursday.

For the last three weeks, the Nifty formed higher high candles by closing above the prior week’s high and forming new lifetime highs. The current upswing is six weeks old. The index has been forming similar candles - Hanging Man, for the last four weeks. The 10-week average is in a strong uptrend and acting as support. Expanding Bollinger bands also suggest there is an imminent consolation or a counter-trend in the near term.

As the trend continues without any reasonable consolidation, several elements of doubt are rising. The volume trend is not encouraging. As a rule, a new high without volume support is not a good sign. For the last five weeks, the volumes have been declining. During the last week, the volume of the first three days was much below the average. On Thursday, the indecisive candle formed at an above-average volume. Importantly, the market breadth is extremely negative. Even on Wednesday, a massive 273 points move from the day’s low; it also has an extremely negative advance-decline ratio and below-average volume. Importantly, the relative strength still needs to be improved. With these negative factors, doubts arise about the sustaining trend.

The weekly RSI is about to make a new high, and the daily RSI is hovering around the 60 zone. The daily MACD histogram shows a dull momentum. Normally, at a lifetime high, the trend strength indicator ADX will be above 25, But this time, the daily ADX is at 13.34 and declining. This means that Nifty does not have enough trend strength because the broader market is also weakening. Even the positive directional indicator, +DMI, is flat. The index has developed a negative divergence on an hourly chart. The negative divergence in the daily time frame is not convincingly negated.

Currently, the index is 2.90 per cent above the 50DMA and holds just two distribution days. We cannot bearish until a decline below the 50DMA with an increase in distribution count to more than five or six. The prior week’s low of 22,224 is the nearest support, and the 10-week average of 21,929 is the strong support. In case of a decisive close below this 21,929, it will give us stronger, weaker signals. On the upside, continue with the trend as long as the price makes higher highs and higher lows. As mentioned earlier, the target is open to 22,720 points. We may see an increase in daily trading ranges with increased volatility.

Many of the Nifty-50 stocks are in the lagging quadrant. There are only 11 stocks in the leading quadrant, and except for one or two, all of them are losing momentum. This is not good for a stronger trend. The PSU Bank, Pharma, and Auto sector indices are in the leading quadrant. The Nifty IT and Realty indices were clearly losing momentum and declined into the weakening quadrant. All other sector indices are not in good shape, as they are in the lagging quadrant. The Nifty Mid-cap and Small-cap indices were forming lower highs for the last five weeks, which indicates a weakening broader market.

In these conditions, position sizing is the crucial element for trading. Maintain strict stop losses and do not add aggressive positions.

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