Nifty: Formation of a top or a mere pullback?

The week gone by was historical as well terrifying for D-Street! Historic because Sensex for the first-time ever hit the psychological milestone of 50,000 level and terrifying as high volatility was witnessed in the latter part of the week.  

Nifty began the week on a negative note as it registered losses of over 1 per cent; however, in the next few sessions, it not only recouped its entire losses, which were witnessed at the beginning of the week but also, went onto register a new all-time high. However, a sharp-paced decline that was witnessed on D-Street in the latter part of the week brought the markets on its knees as Nifty ended the week down by 0.43 per cent.  

It’s said that markets give us hints well in advance of what is going to happen in the coming days. So, here are a few interesting observations witnessed in the markets last week, which is signalling that something big is going to happen as these observations are aligned with a host of events, which are lined up in the coming weeks.  

Here are some of the key observations. To begin with, the Indian markets that have been outperforming Wall Street for quite some time, underperformed Nasdaq, S&P 500 & Dow Jones in the last week. Further, Nifty added two distribution days in the last week, taking the total count to five. At the same time, many stocks have breached their 21-SMA last week (January 11-15) count of the stock of Nifty 50 index, which was above its 21-SMA and stood at 39, while the last week (Jan 18-22) count slipped down to 22. In addition to this, the main engine behind the upsurge in the markets was FIIs that pumped in Rs 65,317 crore in November and Rs 48,223 crore in December.   

On Friday, after a long time, they seemed to put off their feet from the accelerator of liquidity as they were net sellers.     

Now, let us look at the technical landscape, what does it indicate? The price action of the week formed a shooting star-like pattern, which is viewed as a bearish reversal pattern that typically occurs at the top of uptrends. The RSI, which is one of the popular momentum indicators, has formed a classical bearish failure swing. A bearish failure swing forms when the RSI moves above 70, pulls back, bounces, fails around the 70 mark, and then, breaks its prior low.   

At present, the index is just placed above its upward rising trendline and the 20-DMA (14,290). Hence, going forward, an emphatic plunge below the key support level of 20-DMA can drag the index down to 14,200-14,130 levels. So, keep a close eye on the 20-DMA in the near term.

The above-mentioned factors and the main architects of the bull-run are reflecting signs of fatigue (FIIs slowing its pace of buying, Bank Nifty confirming bearish implications of prior week's Doji candle and Nifty IT index formed an indecisive pattern on the weekly chart); it would be prudent to avoid any leverage positions and all long positions should be hedged.