Charts indicate bullish bias

The benchmark index snapped two weeks losing streak and ended at three week high. The domestic equities maintained the momentum, with the IT stocks joining the rally. The Nifty gained 293.90 points or 1.68 per cent during the last week. BSE Sensex also rose by 1.7 per cent. The broader indices, Nifty Midcap-100 and Smallcap-100- outperformed by 2.0 per cent and 3.3 per cent, respectively. All the sectoral indices closed higher for the week. The PSU Bank index, up by 4.3 per cent and the IT index is advanced by 3.5 per cent, are the top gainers. FIIs bought Rs7,760.16 crore last week, and the DIIs sold Rs352.1 crore worth of equities.

There are important technical developments that occurred during the last week. The Nifty has witnessed a 'Golden Crossover'; the 50DMA crossed the 200 DMA. This is an indication of a long-term bullish. It also closed above the 30th August high and broke out of the seven-day tight range. More importantly, on a weekly line chart, the Nifty closed above the prior swing high close is a bullish breakout. It also closed above the two-week high. The index has cleared another crucial resistance of a sloping trend line drawn from the October 2021 high by connecting the successive swing highs. Although the Nifty oscillated in a range at the beginning of the week, it gained momentum in the last two days. Two gap-up openings are showing renewed buying interest. It broke the key resistance of 17,778-800. With these technical breakouts, the Nifty is showing strength with a bullish bias and getting ready for a strong rally.

Apart from these strong bullish signals, there are certain cautious signals also evidently visible. On Friday, it formed a bearish belt hold or open high candle at a swing high. This is not a good sign. All the prior swing has formed bearish candles. The cash volumes are still below the average. Another important aspect is that the RRG Relative Strength is still declining. The monthly KST and the MACD lines are not showing any bullish strength, and in fact, they are declining. Only Bank Nifty and Realty sectors are in the leading quadrant. Metal and Consumer durable sectors have high momentum and are in the improving quadrant. But all other sectoral indices are not in good shape. Importantly, very few of the Nifty 50 stocks are in the leading quadrant, and some of them are losing their momentum. The BFSI sectors may be in the limelight for now but may not sustain their momentum for a long period.

The outperformance of domestic markets may sustain for a long period. The Dow and S&P 500 indices are down by 13 per cent and 16 per cent as of the date this year. But, the Nifty is up by a percentage point. If we look at the historical performances, this outperformance may not sustain. The US and European countries are raising interest rates to cut down the inflationary pressures. These measures will squeeze the liquidity in the system. The global fundamentals are weak at this juncture. The weaker markets also may pressurise our markets in the near future. The rise of the Dollar index (DXY) is another factor to consider, which has an inverse relationship with equities. Another important threat is that the over 18 per cent rally in the last 57 sessions may attract profit booking.

On Monday, a move above the 17873 will give the confidence to bulls to continue the rally. On an hourly basis, a move above 17926 will cross the prior of 18115. Above this important resistance, the Nifty will test the 18350-400 within no time. Only a close below the Friday low of 17786 is negative. In the short-term, the 20DMA (17666) will act as strong support. Below expect the rally to reverse. It is better to focus on stocks than the indices next week. Several midcap stocks are breaking out of long consolidation bases.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)