Markets fundamentally fragile

The market continues to rise higher for the fourth consecutive week. The metal and banking stocks led the market in the last week. Nifty rose by 1.5 per cent and closed at 10,768 points with 160.65 points gain. The BSE Sensex also gained by 1.5 per cent. The broader indices- Nifty Midcap-100 and Smallcap-100 - gained 1.4 per cent and 3.5 per cent respectively. The institutional investors were the net sellers during the week. The market breadth is almost 1:1.

Once again the Nifty traded in a tight range of 171 points. There have been at least five tight range consolidations since March 24 low. At the same time, this is the lowest weekly range. In fact, the Nifty has oscillated in the March 9 gap area. It is failed to close above the 200-DMA. On a weekly chart, it is spinning, and on the daily chart, it is Doji on Friday. There are at least two Doji candles, a bearish engulfing and an inside bar last week.

Unlike the previous week, there are no gaps. These kind of indecisive and bearish formations are giving some mixed signals. As there are no confirmations to the bearish formation, we can't assume that the indecisive patterns may not lead to a fall. At the same time, the market conditions are divergent to the fundamental factors. There are negative divergences. After moving above the 61.8 retracement level (10551), the momentum is waning. All the previous swings' highs and current high also have a different price structure. However, there are no bearish signs as of now. Only observation is that the trend is reaching a maturity stage. However, the recent experiences of tight ranges are positive with a faster retracement. This time also, there must be a sharp rise.

The Nifty is trading above the 200-EMA and just one per cent away from the 200-DMA. The 50-DMA is about to cross over the 100-DMA, which is a bullish sign. Though the price is in a tight range, the Bollinger Bands are not yet contracting. All these parameters are positive signs for the market.

The only concern is resistance and momentum. On Friday, Reliance, HUL and TCS protected the Nifty from a more significant fall. During the last week, the participation from across board has been at a low. The market breadth on Friday was very low. Indicators suggest that there is a possibility of further lag in momentum. The Nifty may face resistance at 10,900-11,000 zone. Unless this zone breaks with a jump, the rally may be limited.

If Nifty closes below 10,676 on Monday, the downward moves will begin towards 10,550. A close below this level on a weekly basis means the market has made an intermediate top. The earnings have begun with a disappointing note. The Nifty is trading at a historical high PE and in a bubble zone. If the market is trading at current level, the new earnings will take the PE above 35 levels, which is not healthy. The institutional participation is subdued, and retail participation is at the highest levels. The MF inflows were at a record low. This is an indication of the market at exuberant levels. And the market is fundamentally fragile and technically strong. Try to be cautious at every high and risk management only can save the capital at the current juncture.

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