Time to be cautiously optimistic

Equity benchmark indices extended their winning streak for the fifth consecutive week and closed at lifetime highs. Nifty gained 298.25 points or 2.30 per cent and settled at 13258.55. It recorded all positive closings during the week. The BSE Sensex closed above 45,000 levels, up by 2.1 per cent. The broader Nifty Midcap-100 and Smallcap-100 up by 2.5 per cent and 1.9 per cent respectively. Overall market breadth is positive.

Technically, the Nifty negated the last week's doji candle's bearish implications. It closed at a new lifetime high. It closed above the previous day's high and almost at weekly high. It has decisively broken out of 13-day tight range. This fresh breakout will continue the current uptrend towards 13534, which is 161.8 per cent extension of previous swings.

Even though there are many indecisive or bearish candles in the tight range, it did not close below the prior low. With strong bullish candles on daily and weekly charts, the indecisiveness vanished. Generally, the tight range breakout will result in a sharp move. As we mentioned earlier, the Nifty consolidated for 13 days (is a Fibonacci number) before resuming or reversing the trend.

Last week, it moved with higher highs and higher lows, which is an uptrend sign. The Nifty also sustained above the two-year-long trend line resistance. This breakout is giving a long term directional bias to the markets. As long as the Nifty trades above the 12,800, the optimistic bias and the trend will continue. The more and more sectors started participating, and the breadth is improving. The broader markets are also outperforming.

At the same time, some concerns are haunting the markets. The Nifty moved higher, but leading indicator RSI hasn't made a new swing high. Though the weekly momentum has picked up, the daily momentum is not showing strength equal to the price strength. For the fourth consecutive week, Nifty closed above the upper Bollinger band which is a sign of overstretched rally. On a daily chart, the bands are contracting.

The RSI (73.84) is mildly overbought on daily and weekly charts. The negative divergence on the daily chart is still present. Even though the derivative volume is higher than the previous day, it is still below the average. The Put-Call Ratio (PCR) is at the highest level after March lows. This is one of the indicators to identify the tops and bottom. As a trend following trader, be with the trend and do not try to short in current conditions. It's time to be cautiously optimistic. These are early warning signs for the ongoing trend.

Relative Rotation Graphs (RRG) shows that BankNifty, financial services, and services sector indices are placed in the leading quadrant. Apart from that, the Metal Index has entered the leading quadrant following a strong rotation from the weakening quadrant. The Realty Index has also entered the leading quadrant following a strong rollover from the improving quadrant.

While remaining in the lagging quadrant, Nifty Commodities and Energy groups are trying to improve their relative momentum along with the Infra index. The Pharma and Media Indexes are also seen languishing in the lagging quadrant and may exhibit some relative underperformance against the broader market.

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