It’s ideal to stay focused on large-cap stocks

What Charts Say?

• Nifty registered 80 days of a flat base breakout with high volume
• The 20 DMA is in the uptrend
• The RSI took support at 60 and bounced, which is a bullish signal
• The weekly RSI is at 77.15
• Weekly MACD is bullish

NSE Nifty scales a new high as IT stocks shine on a weekend. After trading in a 479.60 points range and initial weakness, the Nifty gained by 183.75 points or 0.85 per cent. BSE Sensex is up by 0.75 per cent. Broader market indices- Nifty Mid-cap and Small-cap indices- advanced by 0.25 per cent and 0.69 per cent, respectively. Nifty IT and the Realty indices were the top gainers with 4.79 per cent and 4.35 per cent, respectively. On the flip side, the FMCG is the top loser by 2.1 per cent and FinNifty down by 1.0 per cent, respectively. As the FIIs sold last week, the total inflows were negative by 611.04 crore. The DIIs also sold Rs438.03 crore till now this month. The market breadth is primarily positive. The India VIX is slightly up by 3.72 per cent to 13.10.

The Nifty has registered 80 days of a flat base breakout with high volume. It closed at a lifetime high. The index began the week on a weak note and traded within Monday’s range for three days. With IT majors Infosys and TCS’ financial results, the market rallied into uncharted territory. Five out of six top gainers in Nifty were IT stocks. This breakout may have a positive impact for next week, too.

Even though the Nifty registered a bullish breakout, the upside is limited to 22,232 points, which is a 100 per cent extension of the previous uptrend. And it’s just another 238 points away. The current flat base breakout pattern target is placed at 22,306 points. There are some positives in the breakout. The RSI took support at 60 and bounced, which is a bullish signal. It signifies the completion of a consolidation. The above-average volume validated the breakout. The 20 DMA is in the uptrend and acted as support during the base formation. Importantly, the index heavyweights like Reliance, TCS Infosys, SBIN, ONGC, Larsen and Turbo led the rally and pushed the index into uncharted territory.

With several positives in the breakout, there are reasons for limited upside. As mentioned in earlier columns, the Nifty formed the majority of the tops in the months of January, followed by February. At the same time, only seven times in the past 20 years has Nifty closed above the open. So, there is only a 35 per cent probability of closing above the 21,727 points. If the Nifty does not honour this history, the topping formation may happen in the next two months.

The market is already in the overbought condition on the long-term charts. The weekly Bollinger bands are expanded to the maximum and need contraction. No trend will move higher with the forming of corrective consolidation. There must be at least 50DMA before beginning a new uptrend.

The earnings season has already begun. The Vote-on-Account budget is just 13 days trading sessions away. General elections are in another four months. In this scenario, expect the market to consolidate for some period before entering into a strong, bullish market.

The weekly RSI is at 77.15, which is in the overbought and near-extreme zone. It is at a new high and shows no divergence. The weekly MACD is bullish, and the daily MACD is below the signal line. As the index formed a hanging man candle with a long lower shadow, the upside move may continue or stall at any point in time. If the Nifty closes below Friday’s low, it will re-enter the consolidation. The 21,500 points is still a strong support for now. As long as it trades above this support, there is no confirmed opportunity to short the market. However, as the volatile intraday moves may occur frequently, be with the large-cap stocks for the next three to six months. The IT stocks will outperform the market now.

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