Wait for a decisive trend

After many mischievous moves and whipsaws, the market closed higher on a weekly basis. During the week, NSE Nifty gained by 193.2 points or 1.73 per cent. With the out performance from the metal, auto and IT sectors, the Nifty was able to close at 11,370. The BSE Sensex also gained by 1.5 per cent.

The outperformance of Midcap-100 and Smallcap-100 is continuing with 3.7 per cent and 5.4 per cent gains respectively.

Technically, the NSE Nifty doesn't have any bearish signs as it closed at the highest level February 28 on a weekly basis. Non-trending moves and lack of momentum are creating confusion among the traders.

A series of gaps and Doji candles are creating discomfort for intraday traders as they are not able to catch the good moves. Let us examine the present price structure in Nifty.

As shown in the Nifty directional chart, the yearly, weekly and daily trends are up. Half-yearly, quarterly and monthly trends are down. The patterns are up in the all-time frames.

In any case, the Nifty closes above 11,145 this month-end, and the monthly direction also changes to the upside after February. At the same time, if it closes below the 11,144.50, the weekly and the daily directions will turn to the downside. So, it is important to protect the 11,144 level for the bulls.

The above price structure does not give any bearish signs on short to medium term. For the 13th week, the Nifty is able to protect the previous week's low. Unless a weekly low is breached, it can't be bearish. During last week, it is actually registered a new weekly high close.

If it moves above 11,537, the gap of February 28 will be filled. This is the last gap of March sharp fall. Now, the question is whether it will move beyond 11,537 and make a new high.

There are enough technical studies, including Elliot wave, pointing out that there are chances of making a new high in the near future. Before making a new high, there is a possibility of correction towards 10882-11528. The first sign of weakness will be available at close below 11,144. The Nifty will enter into a bearish trend only below 10,528.

But if you look at the indicators set up, which shows the price internals, is not encouraging picture. The divergences are everywhere. The RSI is moving in a downward channel, and unable to make new swing highs.

The trend strength indicator ADX is moving downwards. Even though the Nifty is trading above the 200-DMA, the long-term moving average is still in a downtrend. The Nifty is trading above the 20-DMA from May 27, acting as critical short-term support, now, it has flattened. This forces us to think about booking profits at the current level.

In an interview, for the first time, the RBI came out with comments on stock market last week. He believes that there's a disconnect between the real economy and the stock market. The governor pointed out the excess liquidity is fuelling the stock market exuberance, and a correction will be witnessed in the near term.

Markets are trading at historical high PE of 32. The earnings did not give any pleasant surprises. When the Small and Midcaps are outperforming, please take it as a first caution sign. The same thing happened during the second half of 2018.

The moratorium will end on September 30. The actual NPA skeletons will come out of the system. Let us see how the economy and financial institutions deal with a new situation arising from rising debt and lower incomes. Stay cautious.

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