Further upswing likely for Nifty

The market was moving higher and higher by discounting all the fundamental negative factors. The NSE Nifty closed above the 10,200 level after March 11. During the last week, the Nifty gained 271.50 points or 2.72 per cent. The BSE Sensex also advanced by 2.8 per cent.

The broader indices Nifty Midcap and Smallcap indices closed with 1.6 per cent and 4.2 per cent gains respectively. Except for Nifty FMCG, which lost 1.5 per cent, all other sectoral indices closed with decent gains.

The Nifty Media index is the biggest gainer, with 7.8 per cent. PSI Bank advanced by 5 per cent and Energy index gained by 4.9 per cent. The advance-declines ratio was also improved last week.

Out of the two scenarios discussed last week, the first one has become a reality. As I mentioned a close above 10,200, the probability of reaching 61.8 per cent retracement level 10,551 is high. Technically, the Nifty is making higher highs and higher lows after March 24 bottom.

This is a true uptrend character. It is also moving in an upward channel. The trend reversal happens only in case closing below the channel support. After February 20, the Nifty reclaims the 100-DMA. Now, it made a higher closing and protected the prior bar low on a weekly chart.

As long as weekly low is protected on a closing basis, the uptrend will intact. A close below the prior bar low will lead to consolidation for some period. The price structure shows the strength. The probability of reaching 61.8 retracement of 10,551 level is imminent to make another swing high.

Historically, the bear market rallies can extend up to the 61.8 per cent retracement level or 200-EMA. Interestingly, these two levels currently placed in the same zone. At this juncture, we can't project more than this level as various fundamental factors are not favourable.

Currently, all the indicators are also showing bullish strength. The RSI is in super bullish at 64.32. The MACD has given a buy signal again. The Stochastic oscillator also has given a buy signal. The directional momentum indicator is also showing the strength in trend. The +DI is above the -DI and ADX.

The only negative technical factor is the negative divergence in the MACD histogram. This is the most preferred indicator to find divergences by professionals. In any case, this histogram negative divergence works, we need to wait for a close below the prior bar low. In such a case, the Nifty once again try to consolidate in a range.

Fundamentally, the Nifty once again reached to the February levels. PE (25.49) enters into a bubble zone. Most of the corporate announcements hold that businesses/demand is back to the pre-Covid-19 levels, but the personal incomes are coming down by 30-50 per cent.

Further, direct tax collections are at the lowest level, the Government spending on other than social sector stalled and corporate Capex plans not visible. So, we can't expect everything is to be normal. There are some inherent negatives even before the Covid-19.

The rating downgrades clearly worried about the credit profile. These fundamental negatives may drag the market at some point of time. We are in a precarious condition of fundamental weakness and technical strength. The market rally is because of liquidity. And the retail participation increased to the highest level.

In these divergent conditions, focus only on quality stocks to build a portfolio. In the next three weeks, the corporate earnings season will begin. With two months of no business or very less business, do not expect earnings growth.

The deceleration will automatically drag the market into more stretched valuations. We're cautiously positive on the market direction and portfolio overall for at least 3-4 weeks.

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