Meaningful upside unlikely

Buoyed by the positive global cues, the Indian markets closed higher last week. The Nifty gained 138.6 points or 1.31 per cent. The BSE Sensex also moved higher by 1.3 per cent. The broader indices once again outperformed the benchmarks.

The Nifty Midcap-100 and Smallcap-100 advanced by 2.8 per cent and 2.9 per cent. The Nifty PSU Bank's out-performance continued for another week by 5.9 per cent gain.

The FMCG and IT sectors are in the limelight by advancing 3.7 per cent and 3.4 per cent respectively. The overall market breadth is positive.

The Nifty formed a spinning top on a weekly chart and a classical perfect Doji on a daily chart. These patterns show that the momentum on the upside is waning. There is a hidden divergence in the indicators suggest that the upside is capped.

Even though it sustained the momentum above the 100-EMA, the strength is lagging. Two indecisive Doji candles and one bearish engulfing is an early sign of the weakness. As the benchmark index is moving in higher highs and higher lows fashion, the simple Dow theory says the market is in an uptrend.

The Nifty is moving in an upward channel and near to the resistance. After achieving the target of 61.8 per cent retracement with a gap up opening, it did not sustain. After hitting the 10551 levels, it retraced almost 38.2 retracement.

Barring gap down on June 12, even the prior downswing is also 38.2 per cent. These downswings are limited to two to four days during the current counter-trend rally. The current uptrend range has shifted to the higher towards 10750-10150.

Now, the bigger question is whether the market will move above the upward channel

We try to examine some of the technical evidences. The price is moving higher, but the RSI failed to make a higher high. This divergence is indicating the limited upside and yet to give confirmation to the bearish outlook.

On a 75 minutes chart, the negative divergence is clearly visible. The price is moving in an upward channel within the larger rising wedge pattern. The Nifty several tried to breakdown the upward channel, which is not realised.

The Stochastic oscillator has already given a sell signal in the extreme over the bought condition with a negative divergence. Look at the Bollinger bands narrowing again. Particularly the upper band is contracting more.

This is the indication of sideways action for some period. All the technical evidence in the price and indicators suggest the tiredness in the uptrend. During the November-January period, the market moved up in smaller swings.

This kind of non-trending up-moves is an indication of the distribution. The current broader market participation, the mid and small-caps are dominating the market. Whereas the large-caps lagging when compared to the broader market.

This is another indication of the distribution. As mentioned earlier, the upside is limited, but not in a bearish mode. The only thing, we can't get the much returns now onwards. From now onwards, the position sizing is very important.

As I keep mentioning about the fundamental weakness, valuations are not cheap at the current juncture. The Nifty Price Earnings (PE) ratio reached the 26.67 levels, which is a bubble zone. This is almost January 30 level.

In this stretched valuation scenario, the bubble can burst at any time. The participation of small and micro-cap stock with a higher volume is an indication of a market-topping situation. Avoiding aggressive positioning is the only risk management technique in current market conditions.

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