Indicators suggest over-bought conditions
Even though there are no weaker or bearish signs, it is better to have a cautious approach to the market. Stay with defensive stocks, which have higher relative strength
image for illustrative purpose
On a monthly chart, Nifty has formed a rising wedge pattern, which has a bearish implication. The resistance is around the 24,500 level. The 20DMA is at 23,725 and may act as strong support. Before the General Budget, do not expect to move beyond 24500-600 on the upside and 23,725 on the downside
Positive Market Breadth:
- Closed at another new lifetime high
- India VIX down
- Weekly RSI at 74.44
- RSI in overbought zone
- MACD far away from zero line
- Bollinger band began to contract
- Monthly RSI at highest level after Nov
- Equity market in super cycle bull phase
The domestic stock market continued its restless rally and ended its fifth straight gaining week. The benchmark index, Nifty, traded in the 408.30 points range and closed with 313.25 points or 1.30 per cent net gain. BSE Sensex is up by 1.22 per cent. The broader market indices, Nifty Midcap-100 and Smallcap-100, advanced by 2.43 per cent and 3.40 per cent, respectively. On a sectoral front, the Nifty IT gained by 4.32 per cent, and Pharma is up by 3.66 per cent. The PSU Bank index is the only loser, with just 0.12 per cent. The FIIs bought Rs6,874.66 crore, and the DIIs sold Rs385.29 in the first week of the current month. The India VIX is down by 8.02 per cent to 12.69 per cent. The market breadth is positive for the week.
The Nifty continued its positive momentum last week and closed at another new lifetime high. As we forecasted in June last year, the current rally is a result of an 86-week Stage-1 consolidation. In the previous 55 weeks, the Nifty rallied by 5,869 points or 31.67 per cent. The Index is moving in a systematic bullish trend. After breaking our 73-week ascending triangle in 2014, the Index rallied by 100 per cent by January 2020. This is the historical repeated behaviour of the Nifty. It rallied by 100 per cent when it declined more than 25 per cent for many times.
Post-2020 decline of 38 per cent, the Index rallied by 147 per cent in 19 months. Later, it declined by over 18 per cent and consolidated for 86 weeks. This long consolidation broke out in June of last year. Since then, the Index has continued its rally for the last 55 months. This over 31 per cent rally has two bases, which can considered as Stage-2 bases. As stated earlier, the Stage-1 consolidation target is 26256 by the first quarter of 2026. Before the Nifty can form another base around 25056, which is 89 per cent Fibonacci extension level of the prior trend.
The interesting fact is that monthly volumes were higher in the current month after March 2022. For the last seven months, volumes have been above average, which indicates accumulation or a participation phase. On a lower time frame, the Nifty moved higher in a wavering and indecisive manner. But if we remove the election result day move, it did not form a lower low on a weekly chart. In a nutshell, the equity market is in the super cycle bull phase. The targets are much higher if we have a little longer-term view. However, the Index may have more confusing moves in the shorter period.
In the last six days, there have been only two white candles. Before this, the Index rallied sharply with four strong bullish candles, resulting from a tight range. The Index is now 5.76 per cent above the 50DMA and 2.52 per cent above the 20DMA. The Bollinger band began to contract. This is an indication that the market may enter into consolidation or a mean reversion. The MACD line is far away from the zero line, which is an indication of the stretched market condition. On a monthly chart, the RSI is at its highest level after November 2014, just before the new high, which is a sign of overbought condition on the longer-term chart. The weekly RSI is at 74.44, and the daily RSI is above 72.50. In all time frames, the RSI is in the overbought zone.
On a monthly chart, the Nifty has formed a rising wedge pattern, which has a bearish implication. The resistance is around the 24500 level. Before moving further highs, the Index must correct to the mean levels. The 20DMA is at 23725, and the prior breakouts level is also at a similar level, which may act as strong support. Before the General Budget, do not expect to move beyond 24500-600 on the upside and 23725 on the downside. Even though there are no weaker or bearish signs, it is better to have a cautious approach to the market, as the indicators suggest over-bought and overstretched conditions. Stay with defensive stocks, which have higher relative strength.
(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)
