Market condition highly overstretched

The Nifty ended its seven consecutive weeks gaining streak of a roller-coaster ride last week. It began the week with over 400 points fall on Monday and recovered all the losses by the end of a truncated week. The Nifty lost just 11 points during the week. On the other hand, the BSE Sensex closed positively with a tiny 0.03 per cent gain.

The broader market indices Nifty Midcap-100 and Smallcap-100 indices closed with 1.6 per cent and 0.8 per cent losses respectively. The much broader index Nifty-500 lost just 0.26 per cent. On the sectoral front, the IT, Pharma and the FMCG were gainers with 3.2 per cent, 1.2 per cent and 0.04 per cent respectively. PSU Bank and Metal indices declined by 3.5 per cent and 2.3 per cent. The FIIs bought Rs 41,325.37 core worth of equities this month so far, while the DIIs sold Rs. 33,051.41 crore during this month.

The Nifty formed a Dragonfly doji, which carries the bearish implication if it closes with negative bias next week. The current Doji pattern on the weekly chart is a sign of weakness and could be a potential turning point. But, in recent history, there are several Dragonfly Doji candles on the daily chart, and one on the weekly chart failed to get the confirmation of the bearish reversal. The long lower shadows show the buying interest in every fall. The recovery of over 600 points from the low of 13,131 is also a sign of strength in the market. The RSI on a daily below the overbought zone and shows the potential for an upside. Meanwhile, first negative close after seven weeks of a winning streak and a doji candle is giving a warning sign. As I mentioned last week, the current market condition is highly overstretched, even though there is no fundamental improvement.

The Nifty PE is currently at a record high of 37.81. Even the Nifty trailing Price Earnings are at a record of 27.61, and it also shows the overvalued market condition. At the same time, Nifty forward PE is at 21.96, which is at record high again. One more fundamental factor Return on Equity is currently at 9.63, which is lowest in the last ten years. In liquidity supports these over the valued market. Even the broader index Nifty-500 index, which represents 95 per cent total NSE market capitalisation is trading at whopping 420.61 PE levels. The selective large caps have shown the surprising earnings improvement, but, that surprises missed in mid- and small-cap space. Unless earnings dramatically improve at a record pace, the broader market rally may not sustain.

HDFC

HDFC retested its earlier breakout and moved higher with an increased volume. After a doji candle at a retest level, it formed a bullish candle and conferment the resumption in the trend. The stock is moving in a perfect up trending channel. It is trading above the short-term moving averages. In short, the stock resumed its uptrend. A move above Rs. 2,464 will be positive and the short-term target is Rs 2510, is previous swing high. Above this, continue with a trialling stop loss.

Cadila

Cadila Healthcare closed at three year high and broken out of a tight range with higher volume. The short and long averages are trending up side. The stock is trading 30 per cent above the 200DMA and 4.56 per cent above the 20DMA. In short, the stock is in a bullish price structure. A sustained move above Rs.490 is positive for the stock. Above this, the stock can touch Rs. 520 in a short-term. Maintain the stop loss at Rs.480.

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