Avoid aggressive positions

Equity benchmark indices extended their record-setting trend. The NSE Nifty and BSE Sensex reached new lifetime highs during the last week and closed higher for the fourth consecutive week. The Nifty gained by 215.9 points or 1.2 per cent. The BSE Sensex also rose by 1.2 per cent.

The broader indices, Nifty Midcap-100 and Smallcap-100, up by 1.9 per cent and 0.9 per cent. Nifty Media is the top gainer with 13.3 per cent. Metal and Realty indices are down by 1.4 per cent and 0.9 per cent.

All other sectoral indices were closed with decent gains between 3-5 per cent. The BSE market capitalisation touched Rs260 lakh crores for the first time in Indian stock market history. FIIs bought Rs72.15.39 crores in current month and DIIs sold Rs1414.51 crores. Overall, market breadth is almost 1:1. The India VIX surged by 9.25 per cent and closed at 15.23.

Our target for the NSE Nifty 17,740 met last week. The Nifty scaled to near 17,900 level. With the intense profit booking, it declined over 200 points from the day's high on Friday. The volume was also higher than the previous day, and it added the distribution day.

The total distribution day count in the index is now only two, and not a matter of concern. Only if the Nifty adds another two to three distributions in the next few days will be a matter of concern.

In my earlier report mentioned that September is a subdued month. As of now, the market has not shown any subduedness. But, Friday's move is an early caution for the bulls. The index fell only 0.25 per cent, but many of the stocks closed lower than over a per cent. This wreckage, along with an extreme overbought condition, is not a good sign for the market.

The index also met 100 per cent of the Fibonacci extension target. Whenever a stock or index meets this extension target, it consolidates before taking a new path. Now, expect counter-trend consolidation towards near 20DMA or prior swing low.

A close below the prior day low of 17,537 points is the first sign of consolidation. The next level of supports is at a prior low of 17,254 and 17,108 (20DMA). The highest probability is that the Nifty may breach the 16,922-17,000 zone during the consolidation.

On weekly candle, the price has retraced more than 38.2 per cent and a long upper shadow which are also first signs of weakness. For the last two weeks, Nifty has been taking support at the 17,254-17,169 zone.

This is another level to watch. The important thing to observe is the Nifty's next week's bar. Either will be a lower low or an insider bar. In these two scenario's, the consolidation is on the cards.

In any case, Nifty forms a higher high candle,The RSI has reached 80 zone on all time frames. When the weekly 14 period RSI reaches 80, it forms a top. If the Nifty fails to move above the 17,793 points, we can expect a reasonable retracement for at least two to three weeks.

We need to watch this counter-trend price pattern. If the price pattern is like a flag or pennant, expect the Nifty to touch 18,000 above level. In any case, it forms another box range consolidation, and it confuses the traders about the future move.

Any steep trend needs a consolidation. The price is also near the upper Bollinger band (17859) may act as immediate resistance. On hourly, the Nifty is at MA ribbon support and moving below 17,500 is a weak sign for the shorter period. The hourly MACD has given a sell signal with a negative divergence. Let us watch out for the first hour's price action.

It is better to avoid aggressive positions on either side. The light position size on better relative strength stocks selectively works well in the current market. A cautious approach towards the markets is advised for the coming week.

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