Nifty Will Consolidate If It Doesn’t Move Up

In a nutshell, the benchmark and broader indices have given initial signs of a reversal. However, it needs further confirmation by decisively closing above the 24720-70 zone of resistance

The equity benchmark indices cleared the important resistances last week and registered breakouts. NSE Nifty was up by 2.27 per cent while BSE Sensex gained 2.39 per cent. The Nifty Midcap-100 and Small-cap-100 outperformed the benchmark and rose 4.10 per cent and 4.51 per cent respectively. The Microcap-250 index closed at a new high by gaining 3.54 per cent. The Realty and PSU Bank indices advanced 4.73 per cent and 4.45 per cent, respectively. The Media, IT and Metal indices advanced 3.20 per cent to 3.72 per cent. However, FMCG index was down by 0.11 per cent. The market breadth was positive in all five trading sessions. Foreign institutional investors (FIIs) bought Rs 11,933.59 crore and the DIIs bought Rs.1792.47 crore worth of equities last week.

The Nifty reclaimed the 50DMA last week and confirmed the trend reversal. It retraced 50 per cent of the prior fall. Importantly, the index has registered an inverted head and shoulders pattern. It rallied by 6.85 per cent or 1504.60 points from the November 21st bottom. After an 11.47 per cent decline from the all-time high, this 50 per cent retracement with a higher high indicates the trend reversal. At the same time, it also ended the Category-1 correction. Now, if the index falls below the recent low of 23263, there will be a possibility of Category-2 correction (over 20 per cent). The target of the inverted head and shoulders pattern is 25,813. It can be achieved in the next 4-5 weeks. Before this target, the 25125 may act as strong resistance, and the index may consolidate for some time before taking a directional bias.

However, the Nifty has faced resistance at the 20-week average and failed to close above the 50 per cent retracement level of 24770. The 20-week average of 24720 also acted as resistance. The 100DMA also acted as resistance. At the same time, last week’s 2.27 per cent gain, with a lower volume than the previous week, also raises suspicion about the ongoing trend. Normally, counter-trend rallies end at the 50 per cent retracement level most of the time. With this evidence, this week’s close is most important. A positive close will give further confirmation for the trend reversal. In any case, a decline below the 24481-248 support zone will be negative, and the 20DMA can be tested. Only below the 20DMA, we need to worry about the market. In such case, the index may trade above 23263-25040 for at least next three weeks. Consolidation may shape up a new pattern.

On Thursday, the daily RSI shifted its range into the strong bullish zone. However, a small decline on Friday resulted in a return to the neutral zone. The weekly RSI is above 55, which is a positive sign. There are no negative divergences visible in any time frame. The MACD line is above the zero line, and the histogram shows an increase in the bullish momentum. The +DMI is above the -DMI which is a positive signal on the direction. The ADX also halted the decline and flattened, which indicates the downtrend has ended.

Many large-cap stocks formed a base and broke out. Nifty heavyweights - HDFC Bank, L&T, TechM, and HCL Tech - hit new highs. Infosys is almost at a new high. The Nifty IT index has met our short-term target and registered a new all-time high. The Banknifty is just one per cent away from an all-time high. The Microcap-250 index is at a new high. The Small-cap-100 index is just an inch away from the new lifetime high. The Midcap-100 index has already retraced above 61.8 per cent of the fall. These are the signs of the market’s internal strength. Some laggards will catch up late. Many stocks have formed a Stage-1 base and are in the transition into Stage-2.

In a nutshell, the benchmark and broader indices have given initial signs of a reversal. However, it needs further confirmation by decisively closing above the 24720-70 zone of resistance. The index may consolidate for some time, if it fails to move higher. As the IT and BFSI sectors are showing higher relative strength, the probability of a sharp decline is very thin. It is wise to be with a cautious approach to protect the profits on the table.

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