Markets bullish, but overvalued

Both Nifty and Sensex made new highs last week. Benchmark indices closed positive as Nifty gained 0.9 per cent and Sensex rose 1.0 per cent.

However, the broader market ended with the negative breadth and Nifty Midcap index fell by 0.5 per cent and Smallcap index declined by 0.9 per cent. The Nifty faced some sell-off on Thursday as all the sectors ended up in the red.

On the sectoral front, Nifty Auto emerged as the top gainer with a 2.2 per cent rise for the week followed by Nifty Metal (1.3 per cent) and IT (1.1 per cent). On the flip side, Nifty PSU Bank down by 2.7 per cent was the top loser followed by Nifty Media (2.6 per cent) and Realty (1.9 per cent).

The volatility increased at lifetime highs as the market ended in a flat note at the weekend. Reliance and auto stocks rescued the market from closing below Tuesday's low. If that has happened, a serious bearish engulfing pattern would have occurred.

But BankNifty has formed the bearish engulfing pattern near to its lifetime highs. These patterns are not good signs for the market. Meanwhile, the broader market including Midcap and Smallcaps declined for the second consecutive day. The advances were much lower than the declines.

All the sectoral indices other than energy index closed with losses. At one point of time, Nifty fell 120 points from the day's high. Interestingly, the open and high prices are the same on Thursday, which is another bearish sign. This week, bulls need to move above the last Thursday's high to continue the rally.

With long weekend and weekly expiry, traders did not show interest to continue the positions. Majority of them booked profits. However, the divergences are still continuing. The Nifty made three higher peaks at the same time the RSI made three corresponding lower peaks.

Thursday move may be because of weekly expiry but is giving caution to the traders. Now the bulls need to protect 11,760-11,700 level to move further upside. If you keenly observe, the Nifty is rallying from 11,600 levels since 20th February, but the volumes are consistently declining all these days.

This is a serious worry point for the bulls. All the other indicators also have similar divergences like RSI. Most of the technical parameters are showing the overbought situation in the market.

But, in any time frame, they are not giving any confirmed bearish signals. Unless bearish confirmations occur, one cannot go for shorting the market unless the market consolidates with the levels of 11,700 -11,860.

This will be important for next week. At the same time, the market is trading at historical high PE ratios. In this background, the market is technically in an uptrend position, but fundamentally overvalued.

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