It’s time to book profits as index extended rally

What Charts Indicating?

• Wait for the breakout to take positions on index
• Nifty trading above the key moving averages
• It’s 0.73% above the 50DMA
• Nifty tested the upper Bolinger band and the 20DMA is flattened
• The rally will continue if these two moving averages enter into the uptrend

The equities were subdued at the beginning of the week and on Muhurat trading. The benchmark index, Nifty, gained 306.45 points or 1.58 per cent. The BSE Sensex up by 1.4 per cent. The Mid-cap and Small-cap indices were outperformed by 2.7 per cent and 3.9 per cent. They hit new lifetime highs. The Nifty Auto index also hit a new high. It advanced by 3.80 per cent. The Nifty IT index is also up by 4.06 per cent. The Bank Nifty is down by 428 points or 0.97 per cent. The overall market breadth is positive. The India VIX is up by 6.48 per cent to 11.83. The FIIs sold Rs6,574.59 crore, and the DIIs bought Rs7,702.46 crore worth of equities.

The benchmark index hit a resistance of 78.6 per cent retracement level, signalling that the 15-day rally was exhausted. The positive aspect of the last three weeks of the rally is that above average volume. It closed above the previous week’s high. The index has formed an inside bar with a long wick on a daily chart. It is an open low candle. With the last three weeks’ rally, the index improved its relative strength and momentum and entered into the leading quadrant. If the Nifty surpasses the previous week’s high of 19,875 points, it will lead to testing the above 20,000 levels.

The index is trading above the key moving averages. It is 0.73 per cent above the 50DMA. The Nifty tested the upper Bolinger band, and the 20DMA is flattened. The rally will continue if these two moving averages enter into the uptrend. During the last 15 days of the rally, the contractions were small and limited to two days. But the expansion is more impulsive. But, Friday’s lower high and small range candle shows some tiredness. To continue the rally, it must close above the 19,875 with a big bullish bar and higher volume. In any case, a close below the 19,627 is negative. The 50DMA support is at 19,587 points. Below this, it can be tested that the 20DMA of 19,345 will be the stronger and ultimate support.

There are no divergences visible on weekly and daily charts. But on an hourly chart, the RSI and MACD have developed a bearish divergence. If the index closes below 19,627 points, the divergences will get a confirmation of their implications. The narrowed histogram on a longer time frame shows a decline in the momentum.

The pattern analysis shows that the index is firmly on the upside, and the primary trend is intact. After retesting the prior high, it rallied by 750 points in the last three weeks. The index is firmly above the 20 and 30-week averages and is in the uptrend.

The market is now highly stock-specific. The focus is back on the mid and small-caps.

These broader market indices reached new highs. As the Nifty enters into the leading quadrant, the focus may shift to selecting large-cap stocks next week. It is better to remain selective in stock selection. Watch the index 19627-875 zone, and either side breakout will give clues for the direction. Wait for the breakout to take positions on the index. It would be wise to book profit at higher levels as the index extended the rally.

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