Consolidation likely in liquidity-driven rally

The NSE Nifty closed on a negative note after two weeks of positive trading with 784-point volatility during the last week. The Nifty finally, closed with 169.25 points loss or 1.67 per cent decline. The BSE Sensex lost 1.5 per cent and. The broader indices outperformed the benchmarks. The Nifty Midcap-100 gained over 1.3 per cent, and the Nifty Smallcap-100 declined just 0.7 per cent.

Technically, the Nifty has formed a Hanging Man at the resistance level. There is a unique price action recorded during the last week. The Nifty opened with a Bearish Belt hold, where open is high. Whereas on Friday, the Nifty's opening was the lowest level for the week. A sharp recovery of 450 points from the support of 20-DMA and 50 per cent retracement support has opened many probabilities in the near future.

One thing is sure that it has made and swing low. This swing low of 9,544 will be short-term bottom. As long as this level is protected, the short term trend will remain positive. The weekly candle looks like a dark cloud cover, but not meeting the exact criteria of the pattern. Friday's candle is the most bullish candle in character. This bullish strength supported by volume. This is the reason not to be bearish for now. The Nifty filled two gaps on Friday. As mentioned in the previous column, it exactly filled the gap of May 29, and it also filled the huge 350 point opening gap on last session. Friday's low also acted as resistance on May 13. For this reason, the 9,544 level is an important support for now.

On the upside, we need to watch the price behaviour for the next two days. Generally, after a sharp move, the price tries to consolidate before taking another leg of the decisive move. The Dow Index formed an inside bar on Friday. The Nifty may also follow and could form an inside bar. In such a case, Friday's low and high will become critical support and resistance. In any case, the Nifty closes above Friday's top 9,996, the next level of resistance placed at 100- DMA, which acted as resistance at recent swing high. Closing above 100-DMA means, the benchmark index trying to test the 61.8 retracement level, 10551, whatever the fundamentals are. As mentioned earlier, this level is also a channel resistance once again. There is a high probability reaching this level once 10,200 is cleared.

There is a change in indicator set up. Only a break below of 9,544-9,500 may lead to a channel breakdown. Only such case, the bearish signal will emerge. Above this will be positive bias. In any case, the Nifty does not sustain at the higher levels, then look for 9,770 levels. A move below 9,770 and continues for an hour closing will be the first sign of weakness. In case of this short term, weakness strengthens, there will be a probability of testing Friday's low again.

The weekly Bollinger bands started narrowing. The 20-week averages still in a downtrend. This is the sign of weekly consolidation may occur. The Nifty failed to close above 20Weekly average for the second consecutive week. Lack of follow-through is another sign of weak bullish strength. A daily close below 9770-9700 is a clear sign of weakness.

The market looks technically very strong and fundamentally very weak. The COVID-19 pandemic situation is still not under control. Currently, the Nifty PE is at 24.08. The first-quarter financial results will not show any improvement. In such a case, we are trading at extraordinarily higher valuations. The liquidity-driven rally will not sustain. Try to book profits at every higher level. We may see a reversal in the next 2-4 weeks of time.

(The author is a financial journalist and technical analyst. He can be reached at [email protected])