Indicators show overstretched conditions
MACD reveals an exhaustion in the momentum and RSI is in an overbought condition; These are not bearish signs; Maintain strict stop losses, as it’s important to protect the profits on the table
image for illustrative purpose
Market Overview :
- All moving averages in uptrend
- Well placed above long and short-term averages
- RSI is in an overbought condition
- Index gained 3,310.75 points in just 27 sessions
NSE Nifty closed higher for the sixth successive week and above the 24,500 points. Nifty gained 172.70 points or 0.71 per cent last week. The BSE Sensex also gained by 0.65 per cent. The broader market indices closed flat. Nifty Midcap-100 and Smallcap-100 indices are up by just 0.15 per cent and 0.04 per cent. On the sectoral front, the FMCG and IT indices advanced by 3.56 per cent and 3.45 per cent. On the flip side, the Nifty Metal is down by 2.63 per cent and 2.32 per cent, respectively. The Market breadth is 1:1 during the week. The India VIX up by 8.11 per cent to 13.73. FIIs bought Rs10,718.65 crore and the DIIs also bought Rs5005.38 crore worth of equities during the current month.
The Nifty has been on a record-breaking spree, reaching new highs almost every alternate day. In the last 28 days, it has registered 17 new lifetime highs, a testament to its potential. From the 4th June low (election result day), the Nifty gained by 3,310.75 points or 15.56 per cent in just 27 trading sessions, a remarkable feat. The fact that the weak days were not exceeding more than a day or two in this massive rally is particularly interesting. Currently, the Nifty is holding only two distribution days, which indicates a strong bullish trend, further fuelling excitement about its potential.
The index is now in uncharted territory and well placed above all long and short-term averages. All moving averages are in an uptrend. The 8EMA support is at 24,314 and will act as a strong support. Last week, the index breached this support on an intraday basis. For early signs of weakness, the index must close below the 8EMA and the prior week’s low, currently at 24,141 points. Because of last week’s tight six-day consolidation, the MACD shows an exhaustion in the momentum. The RSI is in an overbought condition. These are not bearish signs, but show overstretched conditions.
From now on, there will be several fundamental factors that will influence the markets. Apart from the earnings, the budget proposals are the key to the trend. The new government’s priorities are generally ambitious, and it expects robust and aggressive policy decisions. The trend will depend on which sector will benefit, or negative will be factored. It is expected that the central banks worldwide may end the interest rate cycle and may ease the funding cost. The RBI will also follow by rate cut policy rates. The low interest rate regime will boost the capex plans. Any harsh proposal on taxation will dampen the sentiments and lead to the medium-term correction. The budget is just five trading sessions away.
The budget may focus on five major sectors. PSUs, Infrastructure, Capital Goods and Engineering, and Defence. The Renewable Energy, Housing and Agriculture may get the attention.
The Nifty IT index is just a few points below the all-time high. It has given early signs of bullish strength in Relative Rotation Graphs by improving the momentum and relative strength for the last two weeks. The index is now entered into an Improving quadrant from the Lagging quadrant. Our Strategy for the sector has proven right. On Friday, the earnings season kicks off with TCS outperformance, resulting in a 21-week Stage-2 base breakout (Remember 21 is Fibonacci Number). The Basing pattern target is at 44838, which can be considered a short-term target, which is just above the 61.8 per cent Fibonacci extension level. The medium-term target is 48,552, which can be met by Q2 FY25. The long-term target is at 52703-54642. The 52703 is the 132 weeks of consolidation (since January 2022 top) pattern target. The 54642 is a 100 per cent extension of the prior strong uptrend of March 2020-January 2022. The large-cap IT stocks will lead the rally, and the mid and small-cap will follow. The second phase of the rally will be led by mid and small-caps by outperforming in terms of percentage gains. It is time to focus on the IT sector, which will lead the market and will help Nifty to achieve the target of 26256 by Q1 of 2026-27.
The Oil and Gas, FMCG and BFSI sectors also have better momentum. Watch these sector stocks’ earnings. These sectoral stocks have a potential in the next leg of the rally. But, it is important to protect the profits on the table. Maintain strict stop losses.
(The author is a Sebi-registered Research Analyst, Chief Mentor, Indus School of Technical Analysis and Financial Journalist)
