Be cautious about long positions

In a lacklustre week, the Indian stock markets closed at marginally high. However, Nifty could not sustain above 12,000 levels.

Finally, Nifty gained just 19 points or 0.16 per cent. The BSE Sensex ended flat with a meagre 2.72 points gain. The Nifty Midcap and Smallcap indices closed with 0.4 per cent and 0.5 per cent gain respectively.

The broader index Nifty 500 index closed with a 12-point gain. Overall, broader indices represent dullness present in the market.

On the sectoral front, Nifty IT index lost 2.06 per cent. FMCG fell by 1.54 per cent and the Auto index lost 1.46 per cent. The Pharma index inched up by 4.49 per cent and PSU Bank index gained 4.16 per cent.

For the last three weeks, Nifty is forming candles with a small body and long wicks or long-legged Dojis. This indecision near to the lifetime highs is creating some bewilderment among the traders.

The current structure of the market looks like a double top kind of formation. For the past 16 trading sessions, Nifty is trading in the 200-point range.

Several times, it took the support of 13 EMA. With this sideways action, the Bollinger Bands are narrowing and the price is at neckline (20 dma) support.

For the past 16 trading session several bars either indecision or bearish bars formed without much correction in the market. After a 1,000 point rally from October 9 low, the market is trying to take rest or consolidating before taking a decisive direction.

Even the most-strong sector index, the Banknifty also formed a bearish shooting pattern on a weekly chart. The recent two swing highs in the Nifty has similarities in their formation.

The first top on November 7 formed as dragonfly doji followed by a big bear candle. The second top on 20th November formed with another doji and followed by a bearish engulfing bar.

This bearish engulfing confirmed on Friday by closing below the engulfing bar. For, this double top kind of pattern will be confirmed only if Nifty closes below the trigger line or a valley point 11,802.

If Nifty closes below this 11800 level, there are higher chances of correcting at least 50 per cent of the 1000 point rally in last one month.

As I discussed last week, 11,800 level is also 23.6 retracement level of the prior upswing. Within this double top pattern, the down and upswings are four days old. The latest downswing is just two days old.

With this observation, we can expect the negative closing may sustain for another 3 days. So, this November expiry day or weekly closing is important for the market direction.

As we discussed in last week, the leading indicator RSI has broken down the upward channel and currently formed a head and shoulder kind of pattern with a neckline at 59.57.

RSI closed at 59.48 on Friday. This means a bigger move on downside is awaiting. At the same time, there is a negative divergence unfolded in this leading indicator.

The negative momentum raised as the MACD histogram increased to negative 17.66. The stochastic oscillator also gives the sell signal.

This technical evidence shows that bears are gaining strength. If Nifty closes above 12,040, the new leg rally will unfold.

Nifty is in an uptrend with three distribution days. Any addition in distribution days will change the trend direction to the downward.

As Nifty is struggling in a range, we need to wait for additional follow-through days. If Nifty gains more than 1.5 per cent on above-average volume, it can trigger a fresh rally in the market.

Most of the banking stocks are not sustaining at the higher levels and retracing towards the recent breakout levels.

Even in the Nifty also, the heavyweight Reliance, HDFC and Bajaj twins protected from a fall. Earnings do give positive surprises and a series of negative economic data points are a worry for the rally to continue.

Currently, the Nifty is trading with 27.77 Price Earnings (PE) ratio, which is in bubble territory as per the fundamental theorists.

So long as Nifty trades below 12,000, it is time to be cautious about the long positions.

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