Time for cautious buying as institutional activity low

The market continued to rise for the fifth week in a row. NSE Nifty rose by 133.65 points or 1.2 per cent. The BSE Sensex also advanced by 1.2 per cent. The broader indices -Nifty Midcap-100 and Nifty Smallcap-100- underperformed as they declined 0.1 per cent and 0.4 per cent respectively. The IT index was the top gainer with 8.1 per cent. PSU bank index fell by 3.9 per cent and Realty index down by 4.7 per cent. The institutional participation in the market is very low. The market breadth is mostly in favour of declines.

The benchmark index finally closed above the 200SMA. As I mentioned earlier, when the Nifty closed above the 61.8 per cent retracement (10551) of the prior big fall, we entered into a bull market. By closing above the 200-SMA, the market confirmed that the market is in bullish mode. After nine days of oscillation within 200 point range, it had moved sharply on Friday and closed highest levels since March 6. As Nifty trading above all the long and short-term moving averages, it is in a confirmed uptrend. The price action in the last two days indicated renewed buying interest. The sharp rise from a lower consolidation range helped in forming a long tail and small body candle at the swing. This Hanging Man candle generally signs of exhaustion of an uptrend. It is also a reversal sign needs a confirmation next week by a close below the Hanging Man closing level.

The other way of looking at the price action is swings and their time. The first swing from March 24 low took just three days for 20.34 per cent rise or 1527 points. The current upswing from June 12 low took 25 trading session to move 1,389 points or 14.55 per cent. This is a clear indication of momentum lag. The Nifty closed above the consolidation zone high, and there are no signs of extreme weakness. But one should understand that the strength is not at the desired level. It is also formed, and a rising wedge and the resistance is at 10,980-11,000 levels. If we look at all the previous tight range consolidation breakouts, all of them moved sharply. If the Nifty moves above the 11,000 levels, the next level of resistance is at 11,377, which is 78.6 retracement level of previous big fall. We may reach this level by mid-August. Though market is bullish, investors need to be cautiously optimistic as valuations are at a historical peak. As long as the Nifty holds last week's low 10563, be with a positive bias. The 20-DMA is also at the same level off 10,574. There is a reason to be cautiously optimistic. The Nifty made a high, but the indicators did not. The RSI is much below August 7 swing high. The MACD is flattening for since June first week.

The market is trading at a historically high Price-Earnings ratio of 28.55. The maximum PE is at 28.67 in January 2020. If the Nifty moves further high towards 11,377, the PE automatically reaches beyond 35, unless a surprise improvement in earnings. At this stretched valuations, it is not wise to go with aggressive buying when the institutions are at low key.

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