Before buying, it's better to wait for clear entry level

The Dalal Street continues to be buoyant for the sixth consecutive week. It was the longest winning streak after April 2019. For the week, the NSE Nifty advanced by 292.45 points or 2.68 per cent and BSE Sensex also rose by three per cent. The broader indices - Nifty Midcap-100 and Small cap-100- advanced by 1.9 per cent and 2.8 per cent respectively. FIIs were the aggressive net buyers as they bought Rs7,791.8 crore worth of equities. On Friday, the advance-decline ratio is negative and overall for the week, not impressive advances.

As per the simple trend analysis and the Dow theory, the stock market is in a confirmed uptrend. The Nifty did not make any lower low or a lower high. As long as higher tops and higher bottoms continue, the uptrend will go on. The only concerns are the valuations on the fundamental side and the momentum in the technical study. The Nifty rose by 1,221 points or 12.25 per cent in the last six weeks. From the March 24 lows, the Nifty gained by whopping 49 per cent. It entered into a confirmed bull market by closing above the 61.8 per cent level (10,551). And this level is also a swing low. Unless the Nifty closes below this level, we can assume that the bull market is intact.

But, look at the price movements for the last four days. Nifty moved just in 182 points range after opening with a gap up on Tuesday. The market recorded several sessions of this kind of trading in the recent time. Every breakout had given sharp moves. For next week also, a breakout will give another sharp move. The question is whether market will go up or down.

As I mentioned earlier, there are no bearish signs in the index. Only momentum was waning and formed a rising wedge. A close above 11,240 will lead to a sharp move towards 11,377 and above. But a decisive close below 11058-11000 will be a breakdown of the rising wedge and first sign of significant weakness in the Nifty. If the index closes below 10,550, it will be a bearish sign.

Many indicators already reached overbought conditions. The MACD histogram was showing that the momentum is clearly nowhere for the last one month. There is a clear negative divergence in RSI on a 75 minutes chart. The cash volumes are stagnant. These are indications that the trend is at a mature stage or upside is limited. Since March 24, Reliance and HDFC twins contributed almost 50 per cent of the 3,683 points rally. This limited participation rally may not be sustained for a longer period. Volumes in Nifty stocks were declining since last one month. Currently, the Nifty is trading at 29.35 Price-Earnings (PE) ratio. In May 2019, the historical high PE was 29.42. At the same time, RBI projected that bank NPAs are going to double in this fiscal. Rising Covid cases and international tensions also weigh on markets.

It is advised to monitor these leading stocks behaviour in the next few to find out overall market mood. Before buying any stock, wait for clear entry levels and watch for fundamental growth on the financial front. (The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)