Strong breakout reiterates technical strength

Domestic equity market benchmark indices ended with a solid gain on Friday. The NSE Nifty closed above the 16,500 mark for the first time. On a weekly basis, The Nifty gained by 290.90 points or 1.79 per cent and settled at 16,529.10 points. The BSE Sensex is up by 2.1 per cent. The broader market underperformed during the last week. The Nifty Midcap-100 and Smallcap-100 declined by 1.2 per cent and 2.2 per cent. With the help of large-cap stocks gains, the Nifty-500 gained by 0.79 per cent. On the sectoral front, the Nifty IT was the top gainer with 4.4 per cent, followed by Nifty Energy 1.4 per cent and FinNifty by 1.3 per cent. On the downside, Nifty Pharma declined by 3.2 per cent and Realty down by 2.2 per cent. The advance-decline ratio was negative most of the days. Even on Friday's big rally to another lifetime high also with negative AD ratio. The institutional participation slightly picked. FIIs bought to the tune of Rs.3495.24 crore, and the DIIs bought Rs.1533.22 crore worth of equities.

The NSE Nifty has broken out of six-day consolidation with a massive breakout with over one per cent gain on Friday. This strong breakout reiterates the technical strength in the market. Our initial target of 16,350 points, mentioned in last week's newsletter, reached the second target of 16,668 points. Before the current consolidation and breakout, the NSE Nifty was gone through eight weeks of consolidation and met the measured targets in just one week. As the current breakout was also stronger enough on the price front, the support levels moved considerably higher.

Undoubtedly, the Nifty has registered a strong breakout and extended the previous week's breakout. As the index is moving higher by forming the bases shows strength in the trend. It may further extend the gains with another sideways price action. Friday's move is equivalent to the six-day consolidation range. Earlier, the eight weeks consolidation of 260 points, breakout target was also achieved in just one week. A series of tight range consolidations and breakout with a big move is also a sign of a good trend. As the support levels are moved higher, the market may not correct significantly for some days. It may consolidate once again and moves higher.

The 20DMA support is at 16,016 points, which is 3.2 per cent away. The index is trading 4.18 per cent above the 50 DMA and 13.14 per cent above the 200DMA. All the trend indicator shows the strength in the trend. The weekly ADX has reached 24.11 after a long time. And the daily ADX is also higher or doubled in the last month to 17.35. The Weekly MACD line also moved above the signal line, is another positive sign. In RSI all the negative divergences have vanished with the strong breakouts. The Nifty is in uncharted territory. We can only be with the trend with trialing stop losses.

But, there are concerns still not addressed. The market is ignoring many historical, fundamental, and technical factors. Generally, the breakouts with negative breadth and low volumes are considered as not trustworthy. The low VIX and IVs are not good for trending markets. The Nifty has already formed four flat bases since April 2020. Generally, Stage-2 will have no more than four bases, and any base will be short-lived. After four bases, in Stage-2, it will experience longer consolidation with a classical distribution. These are the only concerns and confirmations or signals for inherent bearish strength.

With the negative breadth, the strongest bullish move is with a cautiously optimistic bias by trailing stop loss. Keep prior week's low 16,162 as a stop loss. The immediate target is placed at 16,668 points. Apart, the IT sector, the FMCG and Metals may gain momentum next week.