Charts indicate limited upside

NSE Nifty scales a new high as IT stocks shine on a weekend. After trading in a 479.60 points range and initial weakness, the Nifty gained by 183.75 points or 0.85 per cent. BSE Sensex is up by 0.75 per cent.

The Nifty has registered 80 days of a flat base breakout with high volume. It closed at a lifetime high. The index began the week on a weak note and traded within Monday’s range for three days. With IT majors Infosys and TCS’ financial results, the market rallied into uncharted territory. Five out of six top gainers in Nifty were IT stocks. This breakout may have a positive impact for next week, too.

Even though the Nifty registered a bullish breakout, the upside is limited to 22,232 points, which is a 100 per cent extension of the previous uptrend. And it’s just another 238 points away. The current flat base breakout pattern target is placed at 22,306 points. There are some positives in the breakout. The RSI took support at 60 and bounced, which is a bullish signal. It signifies the completion of a consolidation. The above-average volume validated the breakout. The 20 DMA is in the uptrend and acted as support during the base formation. Importantly, the index heavyweights like Reliance, TCS Infosys, SBIN, ONGC, Larsen and Turbo led the rally and pushed the index into uncharted territory. With several positives in the breakout, there are reasons for limited upside. As mentioned in earlier columns, the Nifty formed the majority of the tops in the months of January, followed by February. At the same time, only seven times in the past 20 years has Nifty closed above the open. So, there is only a 35 per cent probability of closing above the 21,727 points. If the Nifty does not honour this history, the topping formation may happen in the next two months.

The market is already in the overbought condition on the long-term charts. The weekly Bollinger bands are expanded to the maximum and need contraction. No trend will move higher with the forming of corrective consolidation. There must be at least 50DMA before beginning a new uptrend.

The earnings season has already begun. The Vote-on-Account budget is just 13 days trading sessions away. General elections are in another four months. In this scenario, expect the market to consolidate for some period before entering into a strong, bullish market.

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