Wait for consolidation, fresh breakout level

The Indian stock market rallied during the previous all five sessions and closed near to the lifetime closing high. With the global markets support, the domestic markets are buoyant with the all-round buying support led by the BFSI sector. The improving economic activity across the sectors and bettered tax collections enhanced the sentiments of the market. The NSE Nifty advanced by 621.15 points or 5.34 per cent during the last week. The BSE Sensex inched up by 5.9 per cent cent and just 59 points away from the lifetime high close. The advance-decline ratio is in favour of gains. The FIIs bought very aggressively by Rs 13,399.41 crore worth of equities during the last week. The DIIs sold Rs6,789.86 cr.

The Nifty closed near to previous lifetime high and just 100 points away from the lifetime closing high. The Nifty's highest close is 12362.3 on January 14. It cleared all the resistances and moved higher with rejuvenated global market support. Technically, it has broken out of a bullish flag with an increased volume. The Flag pole is September 24th low (10790) to October 12th high (12022). It means the pole is 1,232 point high. In a standard classical patterns theory, the Flag breakout will be equal to the flag pole, i.e., 13,162. The current upward channel resistance line placed at the 13,000 levels. Interestingly, after trading above the 200DMA for 79 days, the long term moving average finally turned up. This is a fresh positive sign. After testing the 50DMA for two consecutive days, the Nifty moved higher with declined volatility. The India VIX down by 17.19 per cent during last week and closed at 20.50. The price is not showing any weakness or tiredness on the face of it. But the price internals, the indicators are telling a different story.

The leading indicator RSI (68.45) near to the overbought condition and has mild negative divergence. The Nifty is making higher swings, the indicator yet to make a higher swing. On the weekly chart, the RSI is in the squeeze, and any decisive move above 70 will be a positive sign though it is an overbought condition. The price can be in overbought condition for several days until the supply overshadows the demand. Interestingly, the ADX (18.29) indicates the trend strength still below 20 levels. Generally, above 25 levels considered as a strong trend. The +DMI, which shows the positive strength, is yet to make a higher high and has serious bearish divergence. In the study of divergence, the histogram, which indicates the momentum, has its own specialty. Though the MACD has given a buy signal on Friday by significantly moved above the signal line, the histogram does not form any higher high. Means, any gap up opening on Monday may attract profit booking and leads to consolidation. The last week's 723 points wide range move, may be followed by a counter-trend consolidation by retracing at least 38.2 per cent of the previous week's move. In this background, only the next resistance level placed at the previous closing high of 11,362 and an all-time high of 12,430. Above these levels, it uncharted territory doesn't have any resistance.

As the Nifty ran up very significantly without fundamental support, it may witness an aggressive profit booking at a higher level. Stay cautious as the event result (US presidential election) has come out, it may lead to buy on rumour sell on news kind of situation. Stay cautious at lifetime highs and maintain a strict trailing stop loss for existing positions. But it is not time to build long positions at the current level. Wait for consolidation, and a fresh breakout will give you an advantageous position.

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