Next 3-4 weeks very critical for markets

Indian stock market closed at a new lifetime high on a continuous buying support from the foreign institutional investors. After opening above 14100 level, it traded 400 points range during the last week. Finally, it closed with 328.75 points or 2.35 per cent gain and closed at 14347.25.

The broader market participation also improved during the week. Barring FMCG all the sectoral indices advanced during the week.

The Nifty gained 2811 points or 24.37 per cent since 30th October low. And 1215 points or 9.25 per cent gained in the last 13 sessions. Out of 10 weeks, it closed in positive territory for nine weeks. The negative closing was with a tiny 11 points. The benchmark index was also moving in an upward channel with these two significant swing lows.

Anyone who believes in trend following rules, at least one latest swing, has to broken. Means, the Nifty must close below 21st December low 13131. Or at least a minimum of upward channel support line, currently placed 13770- 13950 zone must have taken off.

In other words, the Nifty is in a strong uptrend with overstretched conditions. It is at multiple resistance levels. As mentioned earlier, there are several resistance levels at 14375 levels. The first one is channel resistance. The Nifty is moving in 45 degrees uptrend. It gained 91.28 per cent from March low.

In the current market, it took just 41 weeks to retrace the entire March fall. Interestingly, the fall is violent than others. In 2008 the fall lasted for nine months, and in 2016 it was 11 months. But this time it was just three months. 2008 fall wall above 60 per cent from the top, this time is just 39.56 per cent.

The interesting observation is that, after 2008 fall, the next major top was made at 162 per cent retracement level. And after 2016 bottom, it retraced 234 per cent. Currently, the retracement is 140 per cent. In any case, the Nifty retraces 162 per cent, and the target is at 15470, which have a potential of another 1000 point rally. It may be an over-estimation, it is a possibility in 2021.

There may be consolidations and corrections before it reaches the target. There is a possibility of at least 23.6 per cent retracement the whole rally means a correction towards 12749. These 1600 points fall looks like another violent fall. This fall may have at least two downswings and three upswings. The possibility of forming a triangle is very high.

The broader market participation is very interesting this time. After 2018 high, the mid and small caps have witnessed a sharp sell-off. The Nifty Midcap-100 index corrected over 50 per cent from the 2018 top. And the Nifty Smallcap-100 corrected over 66.6 per cent.

The Midcap-100 index moved above the 2018 top during the last week. It took 36 months to retrace the 100 per cent of the fall. At the same time, the Nifty Smallcap-100 index is able to retrace only 62 per cent in this period. Another 23 per cent to the 2018 top. The Participation in Mid and small caps is increasing as retail investors interest.

Coming back to the Nifty, It is definitely overstretched as said in previous columns. It is also on overstretched valuations. The recent Foreign Institutional Investors inflow is a main driver for the market. The weakness in the Dollar index is main to invest in India and the emerging market.

Last week's spike in US 10 year bond yields and any technical pullback in the Dollar index (DXY) may pause the inflows. And in just 15 sessions the General Budget is scheduled. This could be a trigger for the market direction. The next 3-4 weeks is very critical for the markets.

It may witness higher volatility, as news flow will dominate the market sentiment. The financial results are already pouring in. Any disappointments or surprises will affect the price movements. Be selective on stocks and be in light position sizing in trading.

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