Markets at an interesting flashpoint

The Nifty traded in the same zone for 14 trading sessions in November before hitting new lifetime high in the last five sessions. It gained 178.60 points or 1.50 per cent in November.

However, most of the gains (141.65 points) came in the last week. The other benchmark index BSE Sensex also made a new lifetime high and closed with 1.1 per cent gain. The Nifty Midcap-100 and Smallcap-100 indices closed with 2.1 and 2 per cent gains, respectively.

On the sectoral front, Nifty PSU Bank index gained 4 per cent, NIfty metal 4.1 per cent and Realty 2.3 per cent. During the week, market witnessed higher volatility due to monthly expiry and economic data.

Even though the benchmark index, the Nifty made a new lifetime high, it also registered two distribution days in the last week and closed below the breakout level. Normally, this is the criteria to assume that it is a failed breakout.

The Nifty got the confirmation on Friday for a bearish pattern - the Hanging man on Thursday with a higher volume. It also closed below the prior bar low, which also a sign of weakness.

On a weekly chart, it formed a long upper shadow with very little or no bottom shadow. The body is almost equal to the upper shadow. This specific price structure indicates that there is a probability of the market witnessing profit booking.

On a monthly chart, the Nifty formed a spinning top at lifetime highs. Generally, spinning tops signal the exhaustion of a rally. Interestingly, there are several factors that are showing markets are exhausted and extended the rally without fundamental growth support.

At the same time, the technical evidences are showing the extended overbought condition. The RSI clearly shows a negative divergence in the Nifty. In any case, the RSI currently at 61.24 reaches below the 59 levels, the negative divergence will give a confirmation to the bearish move on the Nifty.

Till then, any bounce above the 69 in RSI will negate the divergence implications for some time. The Stochastic oscillator has been in an overbought condition for the past five weeks.

Until now, the market is in buy on dips condition. Interestingly, there is a negative divergence in MACD too. When the Nifty made a new high, the MACD histogram is in the negative zone.

This is a rare phenomenon that when the market is at lifetime high, MACD histogram is in the negative zone. Even in Jan 2018, Aug 2018 and June 2019, when the market was at a new high MACD histogram was in green territory.

Incidentally, the negative divergences are visible in June 2019 as well. Before changing the view to bearish bias, wait for the negative divergences to confirm.

Any close above the Friday high will also negate the negative view. With these evidences, it is time to be cautious about the long position in the indices. Hold all the long positions with a strict trailing stop-loss.

Also, economic data points like GDP, core sector growth, fiscal deficit and finally, the earnings growth in Q2, are not encouraging.

The GDP is at 26 quarters low, the full year fiscal deficit target reached in 6 months, the core sectors growth is at the bottom and there are no earnings surprises even after the corporate tax cut.

At the same time, Nifty price-earnings ratio is once again above the 28 level, which is in the bubble zone - historically. This negative divergence of economic indicators at the lowest point and the equity markets at lifetime highs paints an interesting picture.

Only when demand growth improves, the core sector and GDP growth picks up in the future. Select the stocks that shown a 20 per cent earnings growth in Q2 and stick to them for the long term.

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