Weekly Market Recap
Last week I wrote about the inflection point as there had been a divergence between market breadth and the prices which seems to have resolved to some extent this week and moving higher with the price. That’s one of the points about such divergences; they can be rehabilitated, and, when they are, that is really bullish sign.
In the week gone by, the benchmark SENSEX advanced 795 points or 1.44% to reach 56124. Similarly, NIFTY rose 254 points, or 1.55% to reach 16705. BANKNIFTY also performed in line with major indices and gained 1.7%.
Current Outlook
Now, we are seeing another bearish divergence that has developed at the right end of the chart; this has to be rehabilitated. It still could be, but, for the moment, it is a problem for the market to have a higher price that is not confirmed by the indicators as we can in the below panel on the chart. I have enunciated by two verticals blue line; the recent peak in the price not confirmed by the indicators like RSI, MACD, and ROC. And this comes in tandem with a similar-looking divergence in the behavior of the stocks that make up the NIFTY Index.
The divergence between NIFTY and BANKNIFTY is much more pronounced than before, the latter is striving to regain its previous peak while the former has reached an all-time high. It is indispensable to note because it can give us hints about problems with the financial market ahead of those problems affecting the overall market. It is quite apparent that BANKNIFTY is dominated by a handful of really big capitalization stocks. But the smaller one’s fighting for liquidity in the same market, and they are often the first ones to suffer when liquidity starts to dry up; in fact, most of the financials stocks has been corrected significantly in this rising market. It is the same principle as the small birds are more sensitive to the presence of toxic gases.
However, if we look at the chart of NIFTY independently; it is still rising smoothly as if every single correction has been utilized to accumulate or to gather the fuel. Moreover, the price on the daily chart is not far away from moving averages which supports the possibility of further higher prices, but the picture is different on weekly and monthly where the price is way above than moving averages which can be resolved by moving side-ways or a reversal.
Technology and metals are the most dominating sectors in this bull market, and they still have been rising persistently, however, the precipitous rise has always been quite vulnerable for a deep and sharp correction though we haven’t seen any sign of reversal yet, it is a cause of concern. Everyone knows sooner or later the correction will come, how big? that is always a conundrum. Hence, from a price action perspective, the NIFTY outlook still looks good, but the weakness in financials cannot be ignored.
Conclusion
In the current time frame, it is still possible that the above-mentioned divergences among indicators could improve and produce a rehabilitated divergence. That is possible, and I will be on the lookout for it. For now, though, it is giving us a succinct warning but combine with financials it could be a sign of trouble. Hence, we should be ready with exit discipline if required.
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Be Patient…; Be a Savvy Investor..!!
Pankaj