Focus on quality stocks, keep the stop loss for trade bets

The national stock market remained bullish as benchmarks closed higher for the fifth week in a row. It’s the longest winning streak of the year. The NSE Nifty hit an all-time high of 17,947.65 before closing at 17,853.20 on Friday. On a weekly basis, it gained 268.05 points or 1.52%. BSE Sensex broke through the 60,000 level with a weekly gain of 1.8%. For the first time, the market capitalization of BSE reached Rs 261 lakh crores. On the sector front, Nifty Realty and Media are the main winners with 21.2% and 11.7%, respectively. The PSU Bank index and the Metal indices fell 4.4 percent and 3.3 percent. The Pharma Index is also down 0.5 percent. The other sector indices are in a state of rally. During the month, the IFI bought Rs. 7132.72 crore, and the DII bought Rs1,030.37 crore. The overall market width is 1: 1.

NSE Nifty recorded the longest winning streak this year, closing higher for the fifth consecutive week. It formed a higher high and a higher low and a strong bullish candle. Even though the market has overstretched and overbought, the benchmark is resisting the downside. The market is alive thanks to a perfect sector and stock market rotation. It is also holding up to global markets and outperformed last week. But, with a weekly trading range of over 620 points, a spike in volatility is now a point of concern. The Nifty extended over 127.6 percent of previous swings, which we had predicted earlier. It closed well above the 17740 levels, so it can test the 144 percent extension of 18055. The 161.8 percent extension level is at 18368. Because, we can’t expect more than this level. Most likely, the top of the market will be formed at one of these levels.

Now we are going to discuss the downside probabilities. On a daily chart, the index formed a spinning candle. Either way, the Nifty opens with a declining spread and closes below 17,819 points, and the reversal is a reality. In this reversal, the Nifty should not cross the 17326 level. As long as it is trading in the 17326 – 17947 range, the Nifty will consolidate. Another important level to watch is the 20DMA at 17375. For the first time after November 2014, the RSI hit the 80 zone on a monthly chart. And only after April 2006, it closed above 80 on a weekly chart. Whenever the 14-period RSI has hit 80, it has peaked in the past on a longer period chart. This time, too, he reached the condition of extreme overbought within all time limits. As the historically high RSI overbought condition and rally stretched beyond the expected level of 127.6 of 17740, the highest probability is a consolidation for a while above 17254. The VIX of India traded below 18 for several weeks; he even tested the 10 level down several times. Interestingly, India VIX currently, for the 16 week period, is trading below the 18 mark. A similar trend was seen just before the fall of March 2020, when India VIX traded below the 18 mark. bar of 18 for almost 18 weeks. As mentioned earlier, as has been seen many times in the past, the prolonged period of low VIX will result in impulsive and volatile movement. This is exactly what has been happening for two consecutive days.

With a serious increase in volatility and a weekly close above the 18 zone, bears will in all likelihood dominate the market for some time. Even in early 2014, the VIX was out of the range and was closing above the 18 mark on a weekly basis. Therefore, keep a close watch on India VIX; a fence above the 18 mark would be a red flag. Another interesting observation is that the Mansfield relative strength indicator shows that the Nifty is underperforming against the Nifty 500. The outperformance of mid and small cap stocks is a major factor in the market recovery. Both of these important market drivers underperformed last week. Although the midcap-100 index hit a new high, it fell below yesterday’s low and formed a bearish swallow. The smallcap-100 index hit a lower high with a large bearish bar. Industry leading index Nifty IT has made a Doji gravestone and all major IT stocks are also shaped by similar bearish candles. Bank Nifty formed a double top. Historically, in 16 out of 21 years, the Nifty formed a major high in the January-March quarter. The October-December quarter was the most bullish in the past 15 years according to the seasonality charts. This historical fact shows a lower probability of a large bear market to come. Volatility will increase in the short term and it will become extremely difficult to trade in shorter time frames. Therefore, we advise traders to focus on quality names and maintain a strict stop loss for trade bets. In history, it wasn’t until 2016 that Nifty peaked in mid-September, and in 2010, it peaked in October. The Nifty should form a lower high and lower the low bar over a weekly period. Then, all that remains is to change your position towards the downside.

(The author is a financial journalist and technical analyst. He can be contacted at [email protected])

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