Charts indicating caution alert

In A Nutshell

• After 12.84% gain in 7-wk rally, mkt looks overstretched

• Nifty gained 1,323 pts or 6.57% in 11 sessions

• RSI (86.68) has been above the 80 zone for last 7 days

• There’s no weakness on any timeframe

The domestic stock market continued its rally unabated and hit a fresh life-time high. The benchmark indices closed at a new high. NSE Nifty was up by 2.32 per cent, and the BSE Sensex gained by 2.37 per cent. The broader indices, Nifty Mid-cap and Small-cap indices, are up by 2.67 per cent and 3.3 per cent. The Nifty IT led the market with 7.2 per cent, followed by the PSU Bank index with 5.2 per cent. All other sectoral indices were closed positively last week. The FIIs are on a buying spree and bought aggressively last week. They bought Rs.29,733.06 crore in this month. This is the highest level of FII buying after February 2021. The DIIs bought Rs3,182.20 crore worth of equities.

The Nifty extended the rally for a seventh successive week and looks overstretched. It gained by 2,445 points or 12.84 per cent in the last seven weeks, was the sharpest rally in the recent past. During this month, in 11 trading sessions, it gained by 1,323 points or 6.57 per cent. Earlier, the July -October 2021 rally was the impulsive one, with a 19.92 per cent gain in 12 weeks. But there were no gaps in the rally. This time, there are several gaps in the current rally. The first sign of overstretch is the Nifty closed above the Bollinger bands for the second consecutive week.

The daily upper Bollinger band has vertically risen, and the daily RSI (86.68) has been above the 80 zone for the last seven days. Earlier on September 16, 2021, the RSI was at 86.24. Any indicator can be in the over-bought condition for a period. For a reversal, wait for the divergences to be formed at the extreme levels. The weekly RSI (76.46) is above the prior highs. It reacted from the 80.79 level in September 2021. The Nifty is now 8.57 per cent above the 20-week average, which also indicates too much of an extension.

As stated in the past columns, the 18,600-887 zone has become a base for the benchmark index. Any correction of 50 per cent of the current impulsive rally is healthy. This is near the breakout level (20,222) and is nothing, but the retesting of the breakout. Those who miss this rally may be given a fresh opportunity at this level. Any impulsive or straight-line move will attract consolidation. Normally, the consolidation will be 38.2 per cent to 50 per cent retracement level of the prior swing. So, our argument of retesting has the highest probability. But, the question is when.

There is no weakness in any timeframe. The higher volume for the last three weeks indicates the buying interest. Importantly, there is only one distribution day. The market is only in the extremely overbought zone. In these conditions, waiting for negative divergences in the leading indicators and reversal signals. A close below the previous day’s low will be the near-term weaker signal.

With the Federal Reserve signaled to cut the interest rates in the near future, the global market rejoiced. The Dow Jones hit a new lifetime high. As many as 26 developed markets are in a confirmed uptrend. This buoyancy influenced the domestic market, too. As the Dow and other indices closed positively on the weekend, our market may open on a positive note.

In a nutshell, the Nifty moved long away from the mean averages, it is better to stop chasing the market. It is time to protect profits by trailing stop losses. The IT sector index looks strong, and many of the leading stocks were broken out of the weekly base and have the potential to move higher. Other sectors may witness a stock-specific action. It is advised to be highly cautious next week.

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