Nifty: RSI approaches towards exuberant level of 80; P/BV to touch crucial point soon

Nifty is in seventh heaven as it extended its upmove for the seventh straight session on Wednesday. After opening the session with a gap-up, the bulls never looked back and continued to ascend throughout the day. With this, Nifty, for the first time ever, managed to close above the 13,500 mark.

The price action of the day formed a sizeable bullish candle with a gap-up. The formation of a bullish candle with a gap-up clearly threw cold water on the bearish implication of the Doji candle, which was formed in the prior trading session. Also, the Bollinger Band expanded further.

The expansion of the upper Bollinger Band is indicating a trend continuation and the rising 20-DMA is confirming that. Meanwhile, on the lower timeframe chart, it is walking on the upper Bollinger Band and this reaffirms that the trend is strong.

The RSI on the daily timeframe marked a fresh 14-period at 78.89, which is bullish but at the same time, it is inching closer to the 80-mark. Yes, the RSI above the 70-mark is in overbought territory but if we peep into the history, there are some instances, where the RSI has touched the 80-mark. However, in some cases where the trend is strong, the 14-period RSI overbought is said to be at the 80-mark.

In the past, to be specific, during the later part of 2007, the RSI even crossed the 80-mark. Hence, the 80-mark is going to be an important point to watch out for. Also, we have been mentioning the price-to-book value (P/BV), the P/BV ratio is at 3.83. After the global financial crisis, Nifty has reacted lower whenever it has attempted to reach the levels close to 4. So with RSI nearing an extreme overbought territory and P/BV also reaching nearing a crucial point, we would rather say- better be safe and apply strict stop-losses to the trading position.

Going ahead, the gap-area of Wednesday (13,435-13,449) is likely to act as an important level for the index. On the upside, sustaining above Wednesday’s high of 13,550 could lead the index towards the level of 13,700, where the next resistance is likely to be seen.

Overall, the bears had lost many crucial fights and the recent formation of the Doji pattern has been negated as the bears lacked strength after they failed to see any follow-through action. Be with the trend as long as Nifty maintains its rhythm of higher high & higher low.