Nifty in higher high, higher low formation

Despite rupee depreciation, the equity market rallied to the prior swing high. The benchmark index Nifty rallied 670.25 points or 4.18 per cent during the last five trading sessions. It registered one of the biggest gains in the previous 18 weeks. The trading range is also widened to 610 points from mere 390 points the previous week.

The BSE Sensex also gained by 4.3 per cent. The broader indices- Nifty Midcap-100 gained by 3.7 per cent and Smallcap-100 up by 4.6 per cent. Only the Nifty Pharma index lost 0.9 per cent. The other sector indices are up by 6 - 8 per cent. After many weeks, the FIIs turned into buyers in the market. They bought Rs4037.29 crore worth of equities last month. Broadly, the selling pressure from them has receded. In July, they sold Rs6,421.84 crore. The DIIs bought Rs8,307.51 crore.

The Nifty has registered the biggest gain in the last 17 weeks. It formed a very strong bullish candle after May second week. After taking support on 100DMA for two, it formed a bottom and bounced. The Nifty close very near levels of the prior swing high of 16794. After 13 weeks, it also closed above the 20Weekly moving average.

Over 10 per cent rally from the 17th June low has changed the trader's sentiment. During the last week, there are some positive technical development occurred, such as Nifty closed above the 200EMA and 20Weekly MA. The 50 Weekly Moving average (17073) and the 200DMA (17051) are placed at similar levels. Logically, the benchmark index may test these levels next week. Before this, the Index has to face the prior swing high of 16794, which also acted as a support zone several times earlier. For next week, expect that the Index may test the 16794-17073 zone of resistance.

In general, every sharp move has to retrace back to at least 38.2 per cent. Even in the current swing, there are at least two counter-trend retracements occurred. The ten per cent rally from the June 17 low is on low volume. Any rally with a declining volume is not trustworthy. Importantly, the Nifty's RRG Relative Strength is still below 100 and receding.

This means that the Index is underperforming the broader market. The Index closed above the upper Bollinger Bands is an indication of an overextended rally. In the current downtrend, no countertrend rallies extended above the Bollinger bands. It may be a trap. On a weekly, the positive directional indicator, +DMI, is still below the -DMI and ADX. For an uptrend with solid strength, the +DMI has to move above the -DMI. The weekly RSI is in a neutral zone, and has to move above the 55 zone for a stronger market, as stated earlier. A positive crossover in MACD may be possible next week.

For an uptrend, the price must make a higher high and higher low. As long as this structure is not formed, it better wait for a bias to form. As we are in the monthly derivatives expiry week, the rollovers will dominate the market movements. As said above, the 16794-17073 will act as a stronger resistance zone.

On the downside, the gap area of July twenty-second, 16490, will act as immediate support. But, a close below the previous day's low will be the first signal of weakness. In a nutshell, the market sentiment is positive and stable. If the profit booking turns into bearish domination, we can expect increased volatility. It is time to protect the profits on the table and continue with the trialling and stop losses.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)