Market Intricacy
Nifty and Sensex are at new recovery highs. Now is the scenario when bulls are aggressive to buy any weakness. Since Nifty crossed its 55 days weighted moving average on 2 March 2010, it is observed that every bout of selling is met with buyers willing to pick up more shares. What it means after union budget, market exhibits that any pullback is being bought to end higher on weekly basis since Mid February 2010. Now it is 9th weeks, it is closing above its previous week’s closing. Nifty has remained well above its 55 days weighted moving averages since 16 Feb 2010.
Despite the strength, there are some cracks starting to show up. On weekly chart, it is 9th consecutive higher closing of Nifty. At best, the market will extend for more 2 weeks. The 20 days weighted moving average is stretched far beyond the 55 days weighted moving average, and this type is move is typically not sustainable for long periods of time. There is also a minor MACD divergence appearing in the chart of Nifty. While these clues are showing that the markets are losing some momentum, there really are not any signs that market has topped out yet. Hence, a bearish stance would not be appropriate considering the price action, but it also now would not be a prudent time to be chasing stocks higher. Initiating a new position in this area would put a trader in a vulnerable position. While the markets are becoming extended and are vulnerable to a pull back, the price action continues to favor the bulls.
However, it is worth to mention that a number small cap and mid cap stocks are doing well for last several weeks, and there could continue to be opportunities in individual stocks even if the indexes begin to consolidate. The thing to watch for beyond the behavior of the market leaders is to continue to keep an eye on high volume distribution days. While the markets have shown an ability to absorb them recently, if institutions continue to sell into rallies it would only be a matter of time before a deeper correction set in.