Better focus on quality stocks

The Indian stock market witnessed huge volatility during the week with the escalating geopolitical tensions. Nifty witnessed a 382 points volatility in the last three days of the week.

Nifty gained marginally by 30.15 points or 0.25 per cent last week. The BSE Sensex gained by 0.3 per cent. The broader indices outperformed the benchmark index. The Nifty Midcap-100 and Smallcap-100 index rose by 0.6 per cent and 1.6 per cent respectively.

On the sectoral front, the Nifty Realty index gained the most with 3.7 per cent. FMCG index positively closed by 0.9 per cent. But PSU Bank index fell by 2.5 per cent and the Pharma index declined by 0.7 per cent.

After reaching a new lifetime high and breaking out of the consolidation phase, the Nifty failed to sustain at higher levels. It closed below the prior high.

This means the breakout is a failed one. Nifty formed a spinning top on a daily chart and hanging man on a weekly chart.

Last week's bearish engulfing failed to get a confirmation for a bearish breakdown. This is the sixth time Nifty reached 12290 zone and failed to move above.

These parallel high A 382 points move in the last five trading sessions with the gap down and the gap up openings disturbed the structure.

Oscillated around 50DMA for two days after breaking consolidation zone and 127 points gap up on Thursday, 55 points gap up on Friday, made trading difficult on a short-term basis.

A spinning top at lifetime high is not a good sign. This kind of a similar number of parallel highs in Bank Nifty occurred in August 2018 followed by a massive fall of 14.7 per cent.

The Nifty-50 cash volumes are much lower than the average for the past four weeks. There is a reason to mention Bank nifty.

Though Nifty did not get confirmation for last week's bearish engulfing, the Bank nifty got the confirmation and formed hanging man. There is a serious negative divergence like August 2018 in all major indicators.

The negative divergences are still present. Though the Nifty is making parallel highs, but, the leading indicator RSI is making lower highs and moving in a downward channel.

Even more than 300 points rise in just three days also failed to make a new swing high in the indicator. The MACD line is still below the zero line, indicating weak momentum on the upside.

The negative divergence in the MACD is clearer than the RSI. The Average Directional Index (ADX), which shows the strength of the trend, has been coming down from the past few days.

In this background, we will discuss the short-term probabilities, as Nifty is in confirmed uptrend and trading above all short- and long-term moving averages.

On Monday, it has fallen below the 50 DMA. It also traded below the short-term moving average or mean average, 20DMA for three days.

As it made a new lifetime at 12311, 12290-311 range will act as a resistance for the near term. If the Nifty closes above this level with an increased volume, we can expect Nifty can rally up to 12400, as we discussed in this column much earlier. A follow-through day will strengthen the uptrend.

But, if it fails to sustain at the higher level and falls below the 12118, the second round of bearish will resume. As mentioned last week, I would reiterate the stance 'the downside potential is greater than the upside potential'.

The earnings season has just begun with Infosys results. Wipro, IndusInd Bank and HDFC Bank are scheduled to announce their results next week.

Many of the Nifty 500 component companies also announce Q3 financial results. Watch the earnings closely and focus on good quality stocks.

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