Fresh, aggressive buying not advisable

Three days of the rise and two days of big falls forced indices in the negative zone last week. With 333 point volatility, markets witnessed a roller coaster ride and lost just 57.6 points or 0.48 per cent.

Another major index Bank Nifty also closed lower by 209 points or 0.67 per cent. The broader indices Nifty Midcap-100 lost 177 points or 0.99 per cent and Nifty Smallcap-100 lost 1.78 per cent.

The much broader index Nifty500 index lost by 0.70 per cent. After three weeks of huge gain, this small correction is warranted and profit booking at higher levels is common. On RBI monetary policy day, market fell by more than 1.5 per cent and Bank Nifty crashed 2 per cent.

Technically, Nifty formed a long wicked small body candle at the lifetime highs and faced resistance at upward channel resistance line. After rallying 995 points or almost 9 per cent from May 14, lows in just 19 trading sessions, Nifty took a breather for last three days.

One big sharper fall on Thursday indicated the market is in reversal mode. Nifty closed at 23.6 retracement level of May 14-June 3 swing.

The June 3 breakout of 7-day range could not be sustained for the second day and there is no follow-up buying witnessed and formed bearish harami or an inside bar pattern on June 4.

This pattern at a swing high and lifetime highs indicate that the traders are indecisive to move further highs. The rising wedge pattern on the lower time frame broken downside with huge volumes.

This pattern points to a fall toward the May 20 gap area of 11,425. Let us wait and watch whether this will be filled or not.

Just to come out of oversold condition with Thursdays fall on a lower time frame chart, and short covering at the weekend, the Nifty bounced from the lower levels on Friday, closing with small gains.

This tepid bounce with negative market breadth both in Nifty and broader markets gives the indications that strength of the bounce is not sufficient to move further highs unless huge buying interest comes in.

The Hammer kind of pattern on Friday needs to follow a positive close above the 11,900 levels to continue the upward journey. Otherwise, the bears will take the upper hand.

In all the major indicators, the negative divergence still persists in all time frames, which is not a good sign for the market.

Even though the market is making new highs, the MACD histogram is turning down since the last six trading sessions. This shows that the upward momentum is waning.

The leading indicator RSI came into a neutral zone and unable to make a swing high on all time frames. The Williams Accumulation and Distribution indicator is also coming down when the market is making new highs - a sign of distribution at the higher levels.

The trend directional indicator +DI is coming down and -DI is rising, indicating that the strength of the uptrend movement is weakening. These divergences are not good for aggressive buying at current levels.

If the gap of May 20 filled or Nifty fall up to 11,425 levels, there will be some good buying opportunities. On the upside, new upward euphoria will emerge only above 11,960 levels. As long as Nifty trades below 11,960, investors are advised to be on sidelines for the fresh opportunities.

The macroeconomic data points are not so encouraging as the GDP slowed and trade deficit widened. The core sector growth, auto sales and corporate earnings are not supportive of the market to go further highs with fundamental strength.

The Nifty Price Earnings (PE) reached to the historical highs of 29.69 on May 28, and currently, as on June 7, it is still at a higher point of 29.36. With these stretched valuations, aggressive portfolio building, and fresh buying is not advisable.

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