Trade with limited position size till general Budget

The Indian stock market continued the positive movement during the last week. It closed at another new high on a weekly basis, and it hit a new all-time high on the first three trading sessions. With a highly volatile session on Friday, the Nifty lost over a per cent. With this fall, it closed below the weekly opening after seven positive closings. On a net basis, the Nifty advanced by 86.45 points or 0.60 per cent last week. The BSE Sensex also gained by 0.5 per cent. The broader indices Nifty Midcap-100, Smallcap-100 declined by 1.2 per cent and 0.6 per cent respectively. On the sectoral front, Nifty PSU Bank gained by 5.9 per cent and Auto index up by 4.5 per cent. Nifty Metal index is down by 2.3 per cent and Pharma index declined by 1.9 per cent. The FIIs bought Rs 16,901 crore and the DIIs sold Rs 12,323.26 crore worth of equities during the current month.

The Nifty extended its weekly gain but, it has given a weakening signal by forming a bearish candle. After eight weeks it closed below the weekly opening. The last two days of price action during the last week suggests that the market is entering into consolidation before the general Budget. It formed a candle similar to a gravestone doji or a shooting star. Any negative opening will give a directional bias to the bears. One important observation is that, during the last week, the trading ranges have shrunk and the low volume indicates the rally's tiredness. It registered a distribution day, as the Nifty fell by over one per cent on higher volume than the previous day. Now the distribution count is three, and any increase in the count will change the market direction. Though it is trading 2.62 per cent above the 20DMA, the distance is cutting down as the Nifty entered the consolidation for the last two days.

It closed below the very short term 5EMA after 23rd December. Moreover, it is started trending down. This is the first sign of weakness in the index. At the same time, it also breached the 8EMA support on an intraday basis. A close below this level and a cross under these two indicators will have an impact on the trend. The 20DMA support is placed at 14064. The channel support is at the same price points.

The RSI remains in overbought conditions on weekly and daily charts. On the daily chart, it sharply down by 10 points to the 70 line. The MACD histogram suggests that the bullish momentum has clearly declined. Even the negative movement indicator -DMI is started rising. Three lower high candles also an indication of exhaustion. Only above 14618- 14654 zone of resistance the market resume its uptrend.

The US Dollar was looking weak as the new president's stimulus package announcement. This may result in the continuation of the FII flows into the Indian and emerging markets as well. Interestingly the India VIX has risen by over 16 per cent and closed above 24. As earlier mentioned, any move above 24-25 zone is an indication of high volatile days. As we are trading near 40 PE zone, the market is clearly overextended its rally technically, and it is overvalued fundamentally.

Stay cautious and trade with limited position size till the general Budget. The General Budget may act as the trigger point for the market near future. The earnings are mostly in line and showing a very limited impact on the market as they are already discounted. There are only nine trading sessions before the Budget. Watch for price action for the next two weeks, and any increase in volatility may cause the traders profitability.

(The author is a financial

journalist and technical analyst.

He can be reached at [email protected])