Rally may enter counter-trend consolidation

Domestic equities climbed to new highs after a week-long wavering behaviour. The benchmark index Nifty gained 232.70 points or 1.20 per cent. BSE Sensex also gained by 1.20 per cent. The Nifty Midcap-100 and Smallcap-100 indices are up by 1.25 per cent and 1.85 per cent, respectively. Nifty IT is the top gainer with 4.7 per cent, followed by the Metal index with three per cent. The Bank Nifty declined by 0.24 per cent, and FinNifty was down by 0.18 per cent. The VIX closed at its lowest after December 2019. The Market breadth is almost 1:1. FIIs bought Rs14,582.63 crore and the DIIs sold Rs8,129.50 crore worth of equities in the current month.

The bears again failed to get the confirmation for last week’s Shooting Star candle. The Bulls pushed the index above the previous week’s high. All the bearish patterns failed in the recent past. The Nifty has formed a bullish candle in all time frames. The weekly volumes were recorded above average, which means the fresh breakout is valid. Currently, there is only one distribution day, which depicts the trend strength. After forming bearish candles in the last five days, but failed to close below the previous day’s low or to form a lower low candle. During the current upswing, there are three impulsive swings and five bases, including the bottom base. The trend is very strong as the index sustained above the 20DMA during this 2677 points or 15.82 per cent rally in just 72 days. During the bases, it trapped the bears with bearish patterns. The weekly patterns also failed during this rally, which is the uniqueness of the current market structure. The index extended over 38.2 per cent of the April 2020-October 2021 rally of 148 per cent. The 88-week consolidation breakout sustained for the third week. With this, we can consider this breakout as a Stage-1 breakout. As mentioned earlier, the targets are very high. Without trying to predict and decode future outcomes, we will take what the market gives us and continue to monitor unfolding conditions. Unless there is an increase in distribution days, and breaches the crucial support, be with the trend.

To continue this confirmed uptrend, the Nifty must not close below the crucial support of the 18600-538 zone. The rally may pause and enters into a counter-trend consolidation for some time. Whatever the pattern of consolidation, it must sustain above the breakout level. The 10-week average placed at a similar level of 18769, which may act as immediate support. During the consolidation, it may fill the gap of the previous week, where it can test 19200. We also keep in mind that none of the gaps since March 20 have been filled. As mentioned above, if the nearest gap of 19,200 is filled, closing below the gap area will lead to a short-term correction.

The RSI is above 71 in weekly and daily charts, showing it is in an overbought condition. The daily RSI has developed a negative divergence. The earlier divergences failed to get a confirmation for their implications. The positive directional indicator, +DMI, is declining, which is an indication that the strength of the trend is declining, though it has made a new high.

Not only pattern failures, but also the market ignored many other technical and fundamental parameters. Firstly, the current uptrend is with the lowest Relative Strength. The mother or relative strength indicators like Stan Weinstein and Mansfield RS show that the index is underperforming compared to the broader market index, Nifty-500. The low VIX scenario has continued for the past few months. A low VIX is always a dangerous signal for the up-trending market, as it has an inverse relationship. In these conditions, we can’t be complacent in protecting profits and capital. Stay cautious.

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