Is Nifty Forming a Top

Jan 8, 2021

In this video, I'll tackle the hot topic of the Nifty topping out.

I want to show you why the bears have been looking stronger recently and why the bulls have been tiring.

The charts show a very clear divergence between the upward price move and the upward momentum.

In other words, the market may be running out of steam.

Let's take a look at why this is the case.

Let me know your thoughts on this.

Hi everyone. Welcome to the Fast Profits Daily video series. I'm British Bhatia, research analyst at Equitymaster.

So in this video will be covering a hot topic - Is Nifty forming a top?

Many would be thinking that how much the rally could last, so as such there is no such rule that how much he really can last, and it can see and higher levels as well.

But there are some technical stuff, which is indicating that momentum could be paused. The bulls seems to be tiring. Why?

So if you look at the chart on your screen, it is the monthly chart of Nifty and if you look at the vertical lines on your screen, they are the month end which is December and from the next bar, it starts with January.

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If you look at the whole last 10 years for the decade of historic moves, Nifty generally forms bottom or top, or the reversal move in January and February.

Why am highlighting this? If look and the December month it was fantastic, month for the bulls. If you looks at January, we are merely one week down, and it's still trading on a bullish momentum.

Now, if you look at the whole chart out of ten, eight times Nifty has seen a strong reversal coming in January or February.

There was just one year where the markets were consolidating but if you look at Jan and Feb, it was a start of the momentum. So the point we're highlighting is January, February is a strong contender for reversals better than continuation. So is the bullish momentum continuing?

Bears might comeback strongly between January and February. So this is the monthly historic move, which I am talking about.

Just let's go down to the weekly charts. So if you look at the weekly chart right from 2021 to 2020, again 10 years data which I am taking off and if you look at the red line on the screen, the vertical the rising trend line the red line, the markets are taking resistance right at the peak of the red line.

So what I've done is I have connected the close, the higher closes right from 2010, 2015, 2018 and 2021. Now where markets are resisting around these levels and look at the lower panel of that it's called MACD, which is moving average convergence divergence and we if look at those averages, they are indicating the highest level of the decade and we haven't seen such levels in last 10, 15 years, and this is an extreme move which we have seen in the Nifty and the bulls are very much strong.

But if you look at the averages, at some point of time, this average has to converge. We are witnessing divergence from the integer line and they have to some point of time obey law of gravity, what goes higher, has to come to the mean, and we think this could be the indication that if you look at the resistance and the rising trendline plus the MACD, the momentum could be curtailed.

Now let me go to the lower time frame. If you look at the chart on the daily, these two bands which are going into the green line and the middle line, the brown line, which is the average, this is known as the Bollinger Band. This is the average. So what does it do?

If you look at the average of 20 days it takes two standard deviation higher and two standard deviation lower. How to read it?

The prices are testing the upper band, which is the green line, which is the positive two deviations from the average and the prices are resisting around those levels.

Now, if you look at the candlesticks, the body between the close and open, if you look at the momentum with peace showing some sign of fatigue which means that the difference between close and open is narrowing.

If you look at the last couple of days of movement, even though the bulls tried on Tuesday to get a momentum but then on Wednesday and Thursday, the bears attack was strong with is an indication that the bulls are tiring.

So the momentum, it seems that about 14,000 to 40,200, it seems that the bulls are beginning to tire and remember, even if you look at the highs previously, when Nifty has made the new highs, we have seen highs between the round figure of up to 200. So if you look at 12,000, it's somewhere around 200. The previous high around 6300. So such highs are generally when markets moves are around the psychological level and just goes 100 to 200 points higher and then mean might see the reversal. So if history repeats, we might see a reversal.

So at the current point of time, even if we look at the RSI on the lower panel, this is the blue line and it is indicating a negative divergence. So what does it negative divergence mean?

If you look at the price, they're hitting higher highs. Price is going from 13,800 to 14,000 and from 14,000 to 14,200.

But at the same time, the RSI is known as the relative strength index, and it is for me, a stamina for momentum. If you don't have stamina to move higher, at some point of time, you will get tired and tend to reverse.

So it is an indication that the bulls are now tiring. RSI is showing negative divergence which means it is losing its stamina as well. This is a sign for me that the bulls are tiring.

Now, if we look at the moves slightly left of the Bollinger Band, which it has tested, which I have done signed the arrow and we will get the similar structure there, and we have seen a huge downside. A similar structure has formed and it is a sign that bulls should remain cautious. Time to look at some booking of the profits.

The recent momentum, the large caps have seen some of the unwinding, in the derivative space. So in case you haven't subscribed to our telegram channel where I post daily about the OI building up, the long unwinding, the long-short build up, do subscribe to the Equitymaster telegram channel. You will get daily updates over there on OI positions Nifty closing, midcaps, and smallcaps. So subscribe to our telegram channel and so that you receive such kind of derivatives update regularly.

Coming to the charts again. This is indicating to me that something is fishy for the bulls. At least you have to book some profits at some point of time. So I will not say book the whole profits, but at least 10-15% profit booking could be expected and once the 14,000 level breaches on the downside, I think momentum for bears could be slightly on aggressive side.

Bears might accelerate their momentum and we might see again the lower band, the middle band of the Bollinger Band, which is currently at 13,750-13,760 levels.

So there could be momentum down tick by the bears. So just keep a watch on this. Also we have released trading for living videos series in which I have discussed my charts, which I generally follow my three-chart screen, where I do the top-down approach. This is the one where I have shown coming from monthly chart to weekly, and weekly to daily. So also watch that video.

In case like our videos do subscribe to our YouTube channel. Do comment so that we will come up with more such videos for you and keep you updated on the markets.

Thank you. Signing off.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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2 Responses to "Is Nifty Forming a Top"

Premkumar R

Jan 13, 2021

I think he has recommended taking profit of 50 percent.

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Alpesh Patel

Jan 9, 2021

Good information.
Just wondering, if market is loosing steam, why only 10-15% sell is being recommended?! Why it should not be 50 or 75%?

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