Nifty deviates far from its short-term mean; time to be cautious!

The bulls were in control for the sixth straight day on Monday as Nifty scaled to fresh record high level and closed above the 15,100 mark for the first time ever. Nifty breadth remained extremely positive with 40 out of Nifty 50 stocks ending the session with gains. Weightage-wise, Infosys, Reliance Industries, ICICI Bank, M&M, and TCS contributed around 98 points towards the overall gains of the index. The broader indices outperformed the benchmark indices with Nifty Mid-cap and Small-cap logging gains of 1.51 per cent and 1.52 per cent, respectively.   

The price action of the day formed a bullish candle with a gap-up opening. As a result, it negated the bearish implication of the prior session’s candlestick pattern. This is the second unfilled gap in a span of five trading sessions. These gaps are likely to lend support to the index in the near-term.   

In the last six trading sessions, Nifty moved over 11 per cent but the daily range are shrinking as on Monday, the daily range i.e. the difference between high and low stood at 119 points, which is the narrowest range in the last seven trading sessions while theoretically, it has formed a NR7 bar. The unabated upmove in the index without any meaningful corrective moves has made the present levels unhealthy and also, made the index prone to equally sharp corrective bouts. Further, the index has deviated far from its short-term mean (21-EMA). In the past, every time the index used to deviate anywhere between 5-6 per cent from its short-term mean, it was followed by a healthy correction in the market. Also, if we look at the 14-period RSI, it shows a bearish divergence against the price. The trend strength indicator i.e. the ADX has flattened for the last few days on daily and hourly charts. Even the positive movement indicator, +DMI has failed to cross above its prior swing high. These are all signs of waning momentum.  

However, as the index is forming higher highs & higher lows, it is better to be with the trend and maintain a strict stop-loss on all long positions. As long as Nifty does not close below its prior bar low, maintain a bullish bias. Immediate support for the index stands at 15,014-15,041 while on the upside, the level of 15,350 is likely to be a near term target.