Nifty enters confirmed uptrend

The equities rallied to new highs after several attempts of breakout. NSE Nifty rallied by 520.15 points or 2.79 per cent last week. BSE Sensex also gained by 2.76 per cent and closed at a new high. The Midcap index is down by 0.13 per cent, and the Smallcap-100 index is up by 2.0 per cent. On the sectoral front, Nifty pharma is the top gainer with 4.41 per cent, followed by the Auto index with a gain of 4.11 per cent. All other sector indices closed with decent gains. The market breadth is improved. The Volatility index continued to be on the lower side. FIIs bought Rs27,250.01 crore, and the DIIs bought Rs4,458.23 crore worth of equities in June month.

Finally, the Nifty closed at an all-time high with a strong move. After several failed attempts, it made new with an improved market breadth and entered into a confirmed uptrend. The previous four weeks of indecisive moves have given confused signals about the trend. The last three days of massive move with gaps show confidence in the trend. It has formed one of the strongest bull candles. Currently, the Nifty is well placed above the key supports. Recently, oscillation around 18,600 levels and 20DMA zone signaled some kind of uncomforted. At the new high, the index erased all the bearish signals.

Before reaching the new high, the Nifty formed several bearish patterns and failed to get confirmations for their implications. It also negated the weekly head and shoulders pattern.

Since the March low, the index has formed five flat bases and moved in a staircase fashion. As the 88 weeks of consolidation have broken out with broader market participation, we can consider this as a Stage-1 Base and transition into Stage-2. During this long consolidation base, the Nifty has corrected 18.35 per cent. The recent correction was limited to 10.90 per cent. As the recent correction was limited to less than 13 per cent, we can consider this as a Category-1 correction and a bear market correction. After a 147.6 per cent whopping rally from March 2020 low in 82 weeks took a breather for 88 weeks. Only for a brief period the index is below the 23.6 per cent retracement of the rally. With the latest breakout, the targets open for a 38.2 per cent extension of the April 2020- October 2021 rally, which is placed at 19,421pts.

Before reaching this near-term target, the benchmark index needs to attain several strengths. Firstly, at the new high, the relative strength line shows underperformance compared to the Nifty Total Market Index and Nifty-500 Index. The major sectoral indices like IT, Pharma, Energy, and Consumer durable indices are far below their all-time highs. Even in the Nifty 50 stocks, only 25 per cent of the stocks were trading near their all-time highs. At the same time, last week’s rally shows an overextension of the rally, as it closed above the Bollinger bands. The MACD and the RSI have yet to make new highs. The India VIX has remained at the lowest levels for the last few weeks. The volumes were still below the average for the last four weeks.

Last week’s strong breakout has to be sustained above the 18,885-19,000 level to get confirmation. In any case, the Nifty closes below 18,600 level, which is a swing low; in the near term, the breakout will fail. Now the 20DMA support is placed at 18,738pts, and the 8EMA support is at 18,885pts.

If the upside extends, we see 19,250 and 19,421 levels. We also see some relative outperformance from the high-beta stocks. IT and Pharma, Auto, and BFSI stocks will be in the limelight. It is better to be stock-specific, while chasing the up move, keep taking out the profits on every rise and use the dips to buy.

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