Stochastic oscillator showing sell signal in extremely overbought zone

The domestic market snapped its four-day sharp spike. The NSE Nifty declined by 179.35 points, or one per cent, and settled at 17745.90. The Auto and Media indices were up by 0.53 per cent and 0.91 per cent, respectively. The IT and Realty indices were the top losers, with 1.55 per cent and 1.47 per cent, respectively. The other sector indices are down by over half a per cent. The Midcap-100 and Smallcap-100 indices closed in positive territory with 0.13 per cent and 0.21 per cent, respectively. The market breadth is positive as 1050 advances and 995 declines. About 135 stocks hit a new 52-week high and 209 stocks traded in the upper circuit. The volatility index, the India VIX, was up by 4.35 per cent.

The market has ended its four-day winning streak with a one per cent decline. On a weekly expiry day, the benchmark index opened with a big gap down and closed below the opening level. The IT sector continued its fall for the second day with an over 1.5 per cent decline. Broader market breadth is positive, but the index's breadth is severely negative. The higher PCR influenced the market on an expiry day, as we suspected. On a one per cent decline day, the volume has increased to above average, and the Open Interest (OI) is also up over the average. This indicates that a serious profit booking or distribution occurred Thursday. The short-covering has resulted in recovery in the afternoon session. The short-covering failed to move above the opening level.

The Nifty has honoured the resistance at the rising trend line on the 75-minute chart. It opened almost at the low of the previous day. The price structure looks like a spinning top, as it opened a gap-up the previous day and closed higher. But, on, the next day, it opened with a gap-down and closed lower. This structure indicates a rally has matured. It tested the 5EMA and bounced in the afternoon session. The stochastic oscillator has given a sell signal in an extremely overbought zone. As mentioned in the previous column, the relative strength of the Nifty stocks is very poor, and only 10 per cent of the stocks are improving their strength. At the same time, none of the sectors has strong momentum. Only a move above 17995 will resume the uptrend in this condition. A decline below the 5EMA (17679) is negative and will start a fresh downswing. It is better to book a profit if it breaks below the 5EMA.

(The author is financial journalist,technical analyst, family fund manager)