Time to be cautious on long positions

The Indian markets, driven by Diwali new purchases, suddenly turned bullish. Even though there is a lack of earnings surprises in many sectors, across the board buying is witnessed in the market.

The Nifty gained 800 points or 7.21 per cent from the lows of October 9. It rose by 302 points or 2.7 per cent from last Friday close. The BSE Sensex reached to the new lifetime highs during the week. It gained 2.8 per cent.

On the sectoral front, PSU Bank Index is the top gainer with 10.4 per cent during the week. The metal index rose by 6.1 per cent.

Technically, the Nifty is in clear, confirmed uptrend. It retraced 90 per cent of the June-September fall. The sharp breakout of 2-month consolidation with the announcement of the corporate tax cut and retesting of the breakout given opportunity to build long positions in the market.

More than 7 per cent rise in the last 16 trading sessions, and the participation of mid and small cap stocks created a bullish environment in the market. The Nifty has broken out of the downward channel after five days of the tight range.

Interestingly, after the 7 per cent rally, Nifty looks tired with three back to back bearish patterns. On Wednesday, it made a bearish belt hold, and on monthly expiry day (Thursday) it made a shooting star pattern.

On Friday, it fell below the prior day low, but recovered and closed with a small gain. But it formed a dragonfly doji kind of pattern. These back to back bearish formations suggest tiredness in the rally.

Before reaching the new lifetime highs, it may consolidate for some period. The immediate EMA support is placed at 11750. At this level, there will be a chance of retesting the channel breakout levels. In such case, it tests 11,580 in the most bearish scenario.

These dips can be used to build the long term portfolios. At the same time, it needs close above 11,890 required to the continuation of the ongoing uptrend. There is a negative divergence in the hourly chart, but there is no negative divergence in long term charts.

Even though there are three back to back bearish candle formations, a very big bullish candle formed on the weekly chart. The RSI made a new swing high on weekly and daily chart as well.

This leading indicator is clearly moving in a upward channel and in a highly bullish zone. The MACD line is already reached to a higher level than June 3 level, which is a lifetime high formed in Nifty. The histogram is suggesting a bullish momentum.

The Stochastic Oscillator is suggesting an overbought in the index. The bearish patterns on the price and Oscillator overbought condition is indicating that probable profit booking may come in next week.

The trend strength indicator ADX is also in the bullish zone with 25 plus levels. The technical parameters suggest that there are chances of corrective consolidation for a brief period.

Most important judgments including Ram Janmabhoomi, Shabarimala, Rafale are to be announced in next eight working days. These developments may create some furore in the country. The market also may react to the outcomes.

Time to be cautious on long positions. Stock specific activity may continue as Q2 results are in progress.

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