Nifty In Overbought Condition

The benchmark index tested another new lifetime high on a monthly derivates expiry day. NSE Nifty gained by 211.90 points or 0.81 percent and closed at 26,216.05 points. The Auto and Metal indices were the top gainers, with 2.26 per cent and 2.13 per cent, respectively. The Consumption, Commodities, and PSU bank indices are up by over a per cent. The Consumer Durables is the top loser with 0.90 per cent. The Smallcap and CPSE indices are down by 0.50 per cent and 0.28 per cent. The India VIX is down by 5.81 per cent to 12.00. The market breadth is positive as 1,589 advances and 1,207 declines. About 103 stocks hit a new 52-week high, and 88 stocks traded in the lower circuit. HDFC Bank, Reliance, Tata Motors, and Vedanta were at the top of trading countersin terms of value.

Last year, we mentioned the Nifty target of 26,276 points, which was met during the session, at least five quarters earlier. The aggressive buying interest at all-time highs surprised everyone. All the short sellers succumbed to huge losses on the monthly derivatives expiry day. Nifty touched a new high of 26,250.90 points, with a higher volume than the previous day and above average. The index traded sideways most of the time, but the last hour’s huge short-covering led to a 216 points-sharp rally. The index met the 100 per cent extension target of prior swings and long-term monthly swings, too. Now, the Nifty is in an overbought condition or near the extreme zone in all time frames. The index closed out of the Bollinger bands again. The daily RSI (78.11) and the weekly RSI (76.89) are in the near-extreme zone. The Monthly RSI (83.96) in the extreme zone for the past three months. Even the hourly RSI (78.85) is near the extreme zone.

Interestingly, for the last three months, the volume has been declining. There is a saying that the never-sold market can be in overbought condition for a long period. The Nifty is now 5.14 per cent above the 50DMA, which is overstretched. The 20 DMA is at 25,405 points. The nearest support 8EMA is at 25,818 points. It is better to forget to question the sustenance of the trend. As long as the trend is intact and there are no reversal signs, ride the trend with strict risk management. The upside may be limited, which can’t be measured now; keep in mind the downside risks are also will be very severe. The Smallcaps and PSE stocks were underperformers. When the broader market is underperforming, it is better to approach fresh purchases cautiously.

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