Positive bias in market likely as long as Nifty above 20-DMA

Indian equity markets closed on a buoyant note in the last week of May as three weeks of indecision with a negative bias ended with a brisk rally in the last three days of the month. The NSE Nifty lost 279.60 points or 2.83 per cent month-on-month.

The Nifty made a month low at 8,806 on May 18. After oscillating within the May 18 bar for five days, it rallied 551 points in just last three days. If we compare the monthly opening (9,533.50) to close (9,580.30), it actually gained about 47 points.

The Nifty gained over 6.15 per cent with a higher cash volume. Banking and financial stocks sharply recovered. The pharma index has given a breakout of over five-year downtrend. The broader indices Nifty Midcap-100 and Smallcap-100 advanced by 4.8 per cent and 3.9 per cent.

The 'Sell in May and go Away' is not apt this time. The market spent the whole month in ambiguity and confused status. The benchmark indices traded in a range. The dragonfly Doji of May month illustrates the market condition.

It is also an indecision bar. Generally, any sideways or a tight range breakout are violent in nature. It proved again after the breakout of six days tight range or one month of the range. In this range, there are many indecisive or bearish bars formed.

This indecision did not give a chance of bears to take the upper hand. According to a basic Dow theory, a higher bottom and higher top are an indication of an uptrend.

The Nifty has formed a higher top by moving above the May 13 high and higher bottom made on May 18 at 8,806. With this, we are in a short term uptrend. As we projected the weekly for the Nifty met at 9,550. We also anticipated the Channel breakout placed at near 10,000 levels.

The Nifty also retraced over 62 per cent of the recent minor downswing. This evidence is giving a positive outlook for the near term.

Now, the question is that will the current uptrend move above 9,889, which is 50 per cent retracement level of Feb-March sell-off.

Only in case of moving above this level will lead to reaching the 10,300-10,400 levels. We need to observe the Nifty behaviour at this level.

The Nifty closed above the 20 and 50-DMA decisively. But they are still flat to down trending. These two short to medium-term trend indicators need to turn to the upside for trend confirmation.

The MACD line is above the signal line, and the zero line has given the buy signal on Thursday. The RSI is almost at the prior swing high, but the price 3 per cent away to the swing high. +DI is above the -DI is also indicating the positive strength.

So on, there are several setups showing a bullish sign. With this evidence be with a positive bias as long as Nifty trades above the 20-DMA (9,225).

A close below the prior low will be the first sign of weakness, where we need to take out the profits from the table.

Logically, the Nifty should move above 9,889 with current set up. Fundamentally, the ambiguity continues, and there is a flow of negative news.

Even though only two weeks of March quarter impacted with Covid-19, the GDP, core sector, govt revenues, corporate earnings are below par. Without any good reasons, corporate earnings declined significantly.

The Nifty EPS came down from 453 to 428 from January 31 to May 29, 2020. The Price-earnings ratio (22.38) once again reached near to the bubble zone or early March levels.

No one is expecting the earnings improvement in June quarter as two months of national lockdown resulted in almost zero sales for many sectors.

If these conditions be with the trend as long as it continues. Do not hesitate to reverse the trade if any reversal sign appears.

(The author is a financial journalist and technical analyst. He can be reached at [email protected])