Consolidation likely as leading indicators in overbought zone

The domestic equity benchmark indices endured their record-setting spree over the fifth consecutive week as Nifty scaled to a fresh all-time high of 17,340 points. Nifty gainer by 618 points or 3.7 per cent and settled at 17,323 points.

The broader indices, Nifty Midcap-100 and Small-cap-100 outperformed with 4.9 per cent and 4.1 per cent, respectively. Nifty Realty was the top gainer with 10.8 per cent. Nifty Energy up by 4.1 per cent and Metal advanced by five per cent.

All the sectoral indices advanced during the last week. The advance-declines ratio is slightly in favour of advances during the week. During the last five sessions, FIIs bought Rs 6867.73 crores, and DIIs sold Rs 1421.12 crore worth of equities. India VIX is up by 8.49 per cent to 14.54.

The Nifty formed a large bullish candle on a weekly chart, shows strong directional bias as it hit new all-time highs every day of last week and the fifth consecutive week of positive closings.

For just one day, it closed mildly negative; it registered over 200 point rally two consecutive at the beginning of the week. As mentioned in earlier columns, there are no weak signs in the market.

It met the 100 per cent of measure target of the last two months consolidation. It rose by 1,810 points or 11.67 from the July 28 low in just 26 sessions. Before the June-July consolidation, the Nifty has rallied 12.37 per cent in 37 sessions.

During the 200 points consolidation, we hinted that a breakout of the range would be sharper. It exactly met the 100 per cent target of the consolidation.

Now, the question is how long the rally can sustain. The classical technical analysis defined that any sharp upside will enter counter-trend consolidations in the form of flat bases, flags and pennants. Even in the last month's rally, there are two small consolidation bases. These bases are important to get clues about trend continuation or a reversal.

The seasonality chart shows that the September month's performance is subdued for 55 per cent of the time in the last 15 years. The October-December quarter is generally bullish, and the January-March quarter is bearish as per the seasonality charts. Only 55 per cent.

Before entering into a bullish season, it may consolidate for some period next one month. The laggard sectors, Auto and Banks, will outperform the broader market. The other reason is, a majority of the leading indicators are in the overbought zone.

The RSI entered into an extremely overbought condition on daily (82.61) and weekly (77.33). These are the highest levels after the December-January peaks. As the index is at a new lifetime high, no momentum indicators show the weakness. With these basic reasons, the counter-trend consolidation may appear above the 16700-900 zone. As long as this zone sustains, remain with a positive bias.

Technically, the NSE Nifty is moving in a perfect rising channel. Support line or a demand line and the 50DMA exactly placed at almost the same level. The 50DMA is at 16,157 points. At the same time, the Nifty is moving in higher tops and higher bottoms on daily and weekly time frames.

This is a sign of a strong uptrend. Unless it turns into a lower top and lower bottom, a negative bias is not justified. At least a close below the prior day low, will indicate the short-term weakness. As the Nifty formed the strongest candle, where shadows are not visible.

The lowest and highest of the week 16764-17340 will become immediate support and resistance. Only in case of closing below the 50 DMA, the market may enter into a clear downtrend. Interestingly, the 61.8 per cent retracement of the latest up move is at 16,204 points.

There is another fundamental reason not to be bearish on the market a PE Ratio. The calculation or PE has changed from the beginning of this financial year from standalone to consolidated.

With this, the PE ratio has fallen significantly. At the same time, the corporate earnings rise because Nifty companies cut the costs significantly, and the base effect. On April 1, the Nifty PE was at 33.08 and declined to 25.49.

The other fundamental factor, Price-to-Book value was stable at 4.25 to 4.21. But, still near at 12-year high of 4.48, which indicates overvalue zone.

In a nutshell, the market met its measured target with the sharpest possible upswing. The Nifty also closed above the Bollinger bands, which may cause some retracement back into the bands.

As many technical parameters show overbought conditions, it may enter into consolidation, which is the highest probability. Prior week's low works as key support for now. But, the market may not correct much, as history shows the October-December quarter is most bullish favour of advances.

(The author is financial journalist, technical analyst, family fund manager)