The major indexes have climbed the wall of worries, despite extension of lock down in major metropolitan cities which contributes to low demand and in hopes of swift economic recovery. During the rally, Nifty breached the 61.8% Fibonacci retracement of the COVID crash, which is a positive development. But the market may not be completely out of the woods yet. The recent rally from 10100 to 10600 has been a laborious one, which saw some stiff resistance near the 61.8% retracement zones. The index crawled past the resistances, instead of running away. Also, one must remember that the support and resistance levels and Fibonacci levels are not absolute numbers, but they are ZONES. Due to the momentum of the underlying asset and due to the investor/trader sentiments, the asset prices can pierce past support and resistances. Millions of market participants buy and sell equity assets and it is expected to see extended momentum beyond critical levels. The price action could oscillate around these levels until either one of the buying pressure or the selling pressure overcomes the other. So the support and resistances should be treated as zones and not absolute numbers.
The above chart is that of Nifty Futures plotted with daily volumes. You could notice that the recent rally was on top of reducing volume, which indicates fading momentum. The laborious breach of the fibonacci resistance was supported with less volume and we need to see in the coming days and weeks, if the index trades above this level with increased volumes. Even though Nifty Futures is not a direct representation of the individual stocks, it acts as a hedge. Hence, if the FII & DII are taking aggressive bullish bets on the broader market, it would reflect on the futures with increased volume due to hedging. On the contrary, if the volume increases while the index falls, that would mean bearish bets are being made.
Nifty has been moving in a strict rising channel in the form of a wedge ever since a bottom was made on March 23. Going by book, a rising wedge pattern has bearish connotations. The price action and the swing keeps narrowing, until the setup is broken on the downside. But assuming that we wish to give both the bears and the bulls equal chances, the index should break out of the rising wedge to see significant movement in either direction. Until the channel is breached, the market would continue to be clueless with reducing volumes. Since Nifty is currently at the upper end of the wedge (Resistance Trend-Line), we could witness some selling pressure. The Stochastic Momentum Index, which helps us identify the momentum of the move, is seen forming a bearish divergence. A bearish divergence is formed when the market rallies higher, but the Stochastics fails to form a higher peak. This indicates fading momentum. The momentum loss is supported by the volume decline that we discussed earlier, hence this doesn’t add weight to the bulls. But when the rising wedge is ultimately broken, it might or might not be related to reasons related to COVID, since its already digested by the market. Weirdly, delayed news flows tend to confirm technical setups, instead of the other way around!
In addition to the rising wedge, Nifty is very near to the multi-year trend-line which acted as a support for the market on multiple occasions ever since the market breached the trend-line in early 2018. Since then, the trend-line acted as a support in June 2018, Dec-Mar 2019 and September 2019. A long term support once breached acts as a resistance when the price starts to recover. The trend-line has a zone of 10600-10750, which could act as a near term resistance. If Nifty manages to breach this resistance zone, the bullish momentum could take it near 11200. But since we are witnessing a convergence of multiple bearish indicators at current technical setup (Momentum, Volume, Trend-line, Rising Wedge Resistance), we must exercise caution on aggressive bets on the upside. In whichever direction the rising wedge is breached, the index would see a sharp move in the direction of the breach with increased volumes. Considering these, the immediate resistance zone for the Nifty rally could be around 10650-10750, while the support comes at 10450. If the market closes below 10450, the rally gets nullified and the market could remain clueless until the rising wedge is breached. This breach and subsequent support/resistance would indicate if the market is still in a bear market or if it is a continuation of the bull market.
Bottomline is, if you had already grabbed the opportunity to buy some stocks tactically during March and April, you could book profits partially and preserve cash, which can be deployed later based on the direction of the break out. But fresh entries carry a higher risk of catching a top.
Nicely analyzed