Markets on weaker footing

The Indian markets are nervous at their lifetime highs. For the past five trading sessions, the benchmark index Nifty is trading in just 110-point range. With this narrow range trading, Nifty formed a small body small wicks candle - Spinning top.

After opening with a gap up on Monday, it continued to be bullish on Tuesday and made fresh life highs. Thereafter it did not sustain the momentum and formed indecisive bearish candles in the last three days of the week. This shows that the momentum on upside coming down every day.

Since November 28, the Nifty reached the new peaks for nine times. After breaking down from the narrow range flat base on January 6, it bounced back with gap ups and continue to rise. Now, the market has reached to multiple resistance points, in different trade setups.

As we expected earlier, the 12350-400 zone reached, and all our targets have been reached now. The question now is whether this rally will continue or not? Will the budget works as a trigger point for a decisive market move?

Let's examine the multiple scenarios.Historically, out of 14 out of 16 times, the market made a major top in January month or first quarter of the calendar year. Most of the peaks were witnessed at high price-earnings (PE) ratio of 28 and above.

Valuations wise, we are again in bubble territory with 28.67 PE. In this background, as the earnings season already has begun, any kind of extraordinary performance will take us to a new high. The high PE has become neo-normal since early 2018.

As of now, financial results are not springing any surprises and meeting the market expectations hardly. The interesting observation is that the market rally led by selective large caps is poised to shift to a quality mid and small caps.

As the outperformance is coming from midcap and small stocks in recent times, the improved overall market breadth is indicating that the rally is shifting from the large caps. Nifty Midcap and Smallcap indices were decisively trading above the 200DMA for the past two weeks which is a positive sign for the broader market.

The Nifty Midcap-100 index has broken out of the falling wedge and is signaling bullish reversal. The indicators also suggest bullish momentum. Meanwhile, most of the large caps look tired or in toping formations.

Some of the large caps are also trading with stretched valuations. Any kind of missing expectations from these companies may lead to a market debacle. Now the question is, will these Mid and Smallcap has the capacity to lead the market?

Coming to the Nifty, as it trades at a lifetime high, the trend is clearly up, but momentum is waning. As high at a high PE is neo-normal, the negative divergences have become normal.

In all the leading indicator, very serious negative divergences are visible in all time frames. Most daily bars are small in size or bearish in nature.

At the lifetime high, the leading indicator RSI still struggling to move above the prior swing high. It is moving in a downward channel. The ADX (16.68) indicates the strength still much below the reasonable strength level of 25.

The -DI is above the ADX is not a bullish sign. Though +DI is at a higher level, it flattens when the market is moving up. A look at MACD on a weekly chart reveals that histogram is coming down which means the lack of momentum.

The price swings have become smaller in the recent past - also a sign of waning momentum. On a broader angle, the Nifty is not meeting clear uptrending characteristics.

If you look at the bar by bar, the down bars are more severe and sharper than the smaller up bars. This evidence makes one suspicious of the uptrend in the Nifty.

The upside targets becoming smaller and the downside targets are more with sharpness in nature. This evidence gives me an element of doubt about the near future uptrend. But I will wait for a lower low and a lower high for a bearish stance. It is time to focus on earnings and good quality mid and small caps.

Regarding the levels that are concerned, any close below the prior bar is a fist sign of weakness. A close below 12270 may lead to a reasonable correction initially to the 12100 levels. Only below this, the Nifty may move below the recent swing low of 11929.

A close below 11929, is a trend reversal sign. On the upside, a close above 12395 will lead to the level 12519. Above this level, we need to observe the market behaviour and pattern formation.

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