Wait for a correction before taking long positions

The equity market continued its rally for the second consecutive week and closed above the psychological mark of 10,000 level. For the week, the NSE Nifty gained over 561.85 points or 5. 87 per cent and the BSE Sensex advanced by 5.8 per cent.

The broader indices Nifty Midcap-100 and Smallcap-100 outperformed with 6.7 per cent, and 10.5 per cent gains respectively. The PSU bank index gained the most by 22.7 per cent and followed by media index with 18 per cent and realty index with 12.2 per cent.

Technically, the NSE Nifty formed a bullish belt hold formation. It reached into the gap area of March 12. There are three more gaps after this as the Nifty witnessed the gaps on March 9, March 6 and February 28.

The Nifty decisively closed above the 50 per cent retracement of fall from a lifetime high to March 24 low. Once the gap of March 12 filled by moving above the 10,334, the next level of aim is 10,551, which is 61.8 per cent of retracement.

After January 20 lifetime high, there are two small swing highs, the first one is on 12th and the second is on 20th February. From these swings high, the 61.6 per cent retracement is at 10551, 10428 and 10379.

These levels are to be watched for the near term. In any case, the Nifty closes above these levels; We are entering into a bull market again. The 100-DMA is placed at 10,319, and the 200-DMA is at 10,965. These two are still in a downtrend.

But the medium and short term averages like 20 and 50-DMA are already up-trending since last four days. The Midcaps and Smallcaps have also participated in the market. The market breadth also improved significantly.

The broader index Nifty-500 retraced over 50 per cent from the recent low. 75 per cent of Nifty-500 components are above 50-EMA. These are the most positive aspects of the current market condition.

But before entering into a bull market again, there are several other factors to be considered to be bullish. The 35 per cent rise from the March 24 low is one of its kind in all major bear markets. A rally of 1,335 points or 15.16 per cent from May 18 in 13 days is also extraordinary.

Any trend will have some retracement. It has to make higher lows and higher highs. After moving 15 per cent in 13 days, needs some consolidation. The Bollinger Bands suggesting that consolidation on cards. Look at the last two of price action, it moved nowhere.

The last three days price action limited to 234 points range. All of them are small indecisive bars. Some oscillators already reached the overbought condition.

In this scenario, taking fresh long positions may not be risk-reward favourable. A Gap opening on Monday will have no room for long positions. Particularly short-term traders will be stuck in the trade with limited upside scope.

A move towards 10,335 will attract profit booking. It is advised to wait for a correction towards below 10,000 to 9,750 will give reasonable risk-reward opportunities.

With this 35 per cent rise in the market, the Nifty PE rose to 23.91 from 17.15 on March 23. Means, 35 per cent rise in the market resulted in 40 per cent rise in PE. The earnings are not matching the price action in this period.

When the market rally is not based on the fundamentals, at some point of it has to fall to reasonable valuations. Basically, a liquidity drive market rallies are short-lived in the past. These kinds of liquidity based rallies are short term profit-oriented. Any time market may witness a profit booking.

In this scenario, wait for a correction to take long positions in the market. As there are no signals for weakness in the market technically, do not short the market aggressively.

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