It's time for booking profits

Last week, markets mostly traded in a subdued note, before registering big fall on Friday. While Nifty shed 35.65 points during the week to close at 11178.4 points, BSE Sensex lost 0.4 per cent. The broader indices Nifty Midcap-100 and Smallcap-100 advanced by 1.7 per cent and 2 per cent respectively.

On the sectoral front, Nifty Media index gained the most with 4.8 per cent, and the metal index rose by 3.9 per cent. On the downside, Nifty private bank index and FMCG indices fell by 0.8 per cent each. The domestic institutions were the net sellers in August.

DIIs sold Rs 6554.59 crore worth of shares, whereas FII bought shares worth Rs 11,627.16 crore

However, a lot of exciting things happened last week. Barring on Friday, the Nifty traded in a very tight range of just 136 points. But, it fell by 188 points from the day's high on Friday. After a four indecisive doji candle, the Friday's big fall forced Nifty to close below the last six day's range.

In fact, from 20th July or from 19 trading sessions, Nifty is trading between 10882 - 11373. For last four weeks, the index failed to cross 11370 levels on a closing basis. Even then, there are some positives on the weekly chart. The Nifty did not close below the prior bar low for the last 12 weeks. This indicates that bulls are still strong.

Coming back to the daily chart, Nifty took support at 20DMA on Friday, though it has broken that level on an intraday basis. This is actually a serious breach. If we consider 11882-11373 range as a double top pattern, a close below 11882 will be the first signal for bearish strength.

However, there is no doubt that Nifty is in a clear uptrend even now. A lower low below 11882 is a trend reversal. Besides, there is a clear weak signal in all the indicators. The RSI(57.57) has formed a negative divergence. Watch for 50-48 level in RSI as Nifty has to take support at this level. Otherwise, it will move below 40 level. The positive directional momentum indicator +DMI did not make any higher high since June 8.

This indicates weaker strength in the Nifty rally. As I mentioned earlier, the daily ranges are declining. The Average True Range (ATR) has been declining since March low. The MACD histogram, which is showing bearish momentum since the beginning of this month, has increased on Friday. All these signs are showing a definite weakness in the trend.

Though Nifty has been trading above 200DMA for the last 19 trading sessions, the 200DMA still is in a downtrend. Unless Nifty moves above 11,377 level with a sharper movement supported by increasing volume and institutional participation, the uptrend may halt for some time.

In the last two weeks, we cautioned against long positions. Our stance proved right. At the same time, we are not suggesting to short. It is time to book profits. The market is witnessing distribution in largecaps, and funds are flowing into the mid and small caps.

Further, there could be some profit booking in the leading sectors like pharma and IT. As markets are trading at above 31 PE level, valuations are not attractive across the board. So, it's better to wait for a clear direction.

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