Exercise caution while investing

Nifty closed in positive territory for the third successive week. Last week, Nifty gained 78.70 points or 0.66 per cent. Sensex was up by 0.7 per cent.

The broader indices showed mixed trend as the Nifty Midcap rose by 1.4 per cent and Nifty smallcap index closed marginally lower by 0.1 per cent. After gaining 3.8 per cent last week, the Nifty started this week on a positive note.

But it could not maintain the momentum in the later part of the week as most global indices were weak.

Nifty IT index gained by 3.8 per cent after four weeks of poor performance. The other sectoral index gainers are Nifty Energy 1.8 per cent, Financials 1.3 per cent, Realty 1.4 per cent and Pvt Banks index rose by 0.7 per cent.

The Nifty Auto fell by 3.4 per cent, PSU Bank closed in negative by 2.38 per cent and Pharma index also fell by 1.8 per cent. During May series, the Nifty50 rose nearly 1.48 per cent and the BSE Sensex rallied1.7 per cent.

Technically, 12041, the 23rd May high, will be the crucial level to sustain the uptrend. As this level tested twice and added a distribution day on Friday, this level will be the decider for the market. Interestingly, a series of bearish patterns on different time frames giving some clues on further trend.

On Monthly chart Hanging Man and weekly chart, it formed a Shooting Star pattern. On a daily chart, Nifty formed a Hanging Man with the distribution in the closing day last week. These are all bearish signs technically.

Apart from these bearish patterns, The RSI negative divergences on all time frames is indicating that 12041 level is critical for the market.

The negative divergence is visible in all other indicators such as MACD and Stochastic in all time frames. With this background, in case the major index is unable to move above this level, we can assume that the intermediate top is formed at 12041.

If it moves above this level and sustains for at least two days, the upper side targets are positioned at 12245 and 12320 levels. As the general budget is just a month away, the market moving above this level is little sceptical.

It may remain in the range of 11800-12250 levels before the general budget. Nifty is in a confirmed uptrend as it is trading above all the moving averages.

The medium-term trend indicator 50 DMA is placed at 11602 and the 200 DMA is at 11069. As long as Nifty trades above the 50 DMA we assume that the uptrend is intact.

Another important observation is that the Nifty is trading in the range of 23rd May high and low levels. And, for the last five trading sessions, it is trading in 11812-12039 levels.

On Friday, it almost touched these levels. These levels are important for next week for traders to take positions.

Above 12041, it can reach 12245-12320 as mentioned above. If it fails to move above 12041 and falls below 11812 levels, it can retest the May 23rd low point of 11615.

The other factors like earnings and global markets are not favourable to the markets. The Nifty Price Earnings (PE) ratio, now at 29.49, is still at historical highs and below the expected earnings in March quarter.

Earnings have not been very encouraging. At least 25 Nifty companies gave below estimate performance. With this evidence, as we are trading at stretched valuations, it is advised to be cautious about new purchases.

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