Market enters overbought and overvalue zone

The institutional buying in large-cap stocks helped the market close at lifetime highs during the last week.

The Nifty-50 and BSE Sensex ended at their lifetime closing highs for fews sessions consecutively, but the broader market remained stock-specific and subdued.

During the week, the Nifty gained 185.1 points or 1.53 per cent and the Sensex rosy by 1.6 per cent. Nifty Midcap-100 lost 0.2 per cent and the Nifty Small cap-100 gained by 0.7 per cent.

On the sectoral front, barring Nifty FMCG fell by 0.2 per cent, all other sectoral indices closed in green territory. The Nifty IT gained by 4.2 per cent and the metal index by 3.1 per cent.

Foreign institutional investors were the net buyers in equities all five trading sessions of the week. On the other hand, domestic institutions sold the stocks all five days in the week.

As the markets are trading at a lifetime high, technically in uncharted territory. With the help of index heavyweights, who also made lifetime highs, the Nifty climbed to lifetime highs for four consecutive days last week.

It gained 439.50 points from the 11th December lows in just eight trading sessions. It actually closed little above the 127.6 per cent retracement level.

The distribution day count reduced by two, indicating a positive sign for the market. The next level of resistance or a target is placed at 12,330-12,360, as we discussed earlier columns.

Currently, we can't project more than this level as the market enters an overbought and overvalue zone. The leading indicator RSI (67.45) has broken out of the downward channel and reached near to the prior swing high area of 68.78.

But, when the index making new highs every day, the leading indicator is much below the recent high. Even though the MACD has given a buy signal three days ago on a daily chart, the negative divergence is clearly visible.

Moreover, the Nifty formed a Doji star candle with a little longer upper wick at the lifetime highs. At the same time, the Nifty closed at Upper Bollinger. This shows the tired in the bulls and indecisiveness at the top.

Another, interesting worry point is that the future volumes are consistently lower than the 20-day average volume in the rally from 9th October. Almost 75 per cent of the June-October downward channel breakout target achieved.

As the index is in the over-bought condition and the indecisive formation on the top indicates that the possible correction.

Let us wait and see whether this correction after reaching the target of 12,330-12,360 level or before that. As Steve Nison's Doji rule says that the open of the next candle will decide the trend.

In any case the Nifty opens in the positive territory and closes above open, There are more chances of meeting the target.

But, in any case, the Nifty closes below the Doji bar or prior bar will lead to a said correction. As long as Nifty protects the prior bar low remain with bullish bias.

Nifty is trading at 28.60, which is very near to the historical highest PE 29.90. The PE ratio touched 28+ levels earlier in Feb 2000, Aug 2018 and June 2019 tops.

From there the major indices fell over 10 per cent. As the past experience indicates that the 28+ PE is not a safe level for long-term investments.

The concerns over slowing economic growth and lower consumer demand are the key for any fresh investments. There are indications from the IMF chief that India's rating could be downgraded.

As former Chief Economic Advisor (CEA) Mr Arvind Subramanian says, it is a puzzle to crack "why as the economy is going down and down and down, the stock market is going up, up and up."

So, be cautious as institutional investors could be churning portfolios ahead of the year-end to push up net asset values (NAVs), as indicated by the choppy movement of various stocks.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)