Nifty finally moves out of overbought condition

The Indian equity markets suddenly fell sharply as European countries going for lockdowns again as a new variant of Covid traced. The Sensex fell sharply by 2,038 points. The Nifty fell by 432.15 points or 3.14 per cent, which is highest after the March fall. The Metal and Realty fell over 5 per cent in today's fall. At the same time, the Banknifty declined by 4.10 per cent. The PSU Bank index came sharply down by 6.93 per cent. None of the sectoral index were able to close in positive territory.

The market breadth was worse after March as 1,687 stocks declined and only 254 stocks were able to advance. As expected, the Dollar index started bouncing since morning may lead to a pause in FII flows into the domestic equity market. Monday mayhem in stock market neutralised the last eight days' gains. The benchmark indices sharply fell and registered the biggest loss after 15th October. None of the Nifty or derivative stock were able to close positive in today's fall. The volatility index India VIX rose by 24.53 per cent, which was highest percentage rise after the March fall. With the rise in VIX, expect the highest degree of volatility in the near future.

The Nifty closed below five and 8EMAs signalled the short term weakness.

It has breached the 20DMA on an intraday basis, but, closed above it. The MACD has given the sell signal.

As we keep mentioning overstretched and an extreme overbought condition in the market, finally it is coming out of it. Even the -DMI crossed the +DMI, this is another indication of weakness in the market. The Nifty reached to the short term mean reversion by touching the 20DMA. It is still 22.66 per cent above the 200DMA. We keep mentioning these factors in recent times. Pring's KST and Elders impulse system has turned negative on the Nifty. The Nifty registered a huge distribution day. Any increase in distribution days will be a more significant threat for the ongoing uptrend.

The 50DMA and 50 per cent retracement levels placed 12,621- 12,654. This confluence support is critical for the long term trend. Currently, unless it moves above the 13,772 mark, it is better to avoid long positions, and exit all the existing longs in the index.

(The writer is a financial journalist, technical analyst, trainer, family fund manager)