Counter-trend consolidation likely

Domestic equities climbed to new highs after a week-long wavering behaviour. The benchmark index Nifty gained 232.70 points or 1.20 per cent. BSE Sensex also gained by 1.20 per cent. The Nifty Midcap-100 and Smallcap-100 indices are up by 1.25 per cent and 1.85 per cent, respectively. Nifty IT is the top gainer with 4.7 per cent, followed by the Metal index with three per cent. The Bank Nifty declined by 0.24 per cent, and FinNifty was down by 0.18 per cent. The VIX closed at its lowest after December 2019. The Market breadth is almost 1:1. FIIs bought Rs14,582.63 crore and the DIIs sold Rs8,129.50 crore worth of equities in the current month.

The trend is very strong as the index sustained above the 20DMA during this 2677 points or 15.82 per cent rally in just 72 days. During the bases, it trapped the bears with bearish patterns. The weekly patterns also failed during this rally, which is the uniqueness of the current market structure. The index extended over 38.2 per cent of the April 2020-October 2021 rally of 148 per cent. The 88-week consolidation breakout sustained for the third week. With this, we can consider this breakout as a Stage-1 breakout. As mentioned earlier, the targets are very high. Without trying to predict and decode future outcomes, we will take what the market gives us and continue to monitor unfolding conditions. Unless there is an increase in distribution days, and breaches the crucial support, be with the trend.

To continue this confirmed uptrend, the Nifty must not close below the crucial support of the 18600-538 zone. The rally may pause and enters into a counter-trend consolidation for some time. Whatever the pattern of consolidation, it must sustain above the breakout level. The 10-week average placed at a similar level of 18769, which may act as immediate support. During the consolidation, it may fill the gap of the previous week, where it can test 19200.

The RSI is above 71 in weekly and daily charts, showing it is in an overbought condition. The daily RSI has developed a negative divergence.