Red-hot market runs into resistance zone; investors may book profits

Following a sharp bounce in the market off its June lows, analysts have cautioned investors, seeing that the Nifty valuation premium has gone past 10% to its 10-year historical average

The Nifty50 Index has ratcheted up gains in seven of the past eight weeks, soaring 2,405 points, or 15.7 per cent, during this period. The benchmark gauge last closed at 17,698. Although the momentum appears durable, the Nifty now heads into a key resistance zone of 17,700-plus levels. This could lead to a pull-back due to profit-taking by traders, observe analysts.

“The momentum readings have now reached the overbought zone, but the market is still continuing the momentum, albeit at a slower pace. The next 200-point range of 17,700-17,900 is a crucial hurdle for the index. It is quite possible we may see a corrective phase. But sometimes the index continues to trade in an overbought zone. For this reason, traders must await confirmation of any reversal before taking contra trades. The immediate supports for the Nifty are placed around 17,630 and 17,500. A close below this ought to be considered a sign of reversal,” says Ruchit Jain, lead research, 5Paisa.

Following a sharp bounce in the market off its June lows, analysts have cautioned investors, seeing that the Nifty valuation premium has gone past 10 per cent to its 10-year historical average. A revival in foreign investor flows has been propelling markets since July.

“The Nifty is consistently forming a higher high and a higher low formation, which is broadly positive. In addition, on weekly charts, it has formed a bullish candle that also supports a further uptrend from the current levels. However, 17,900-18,000 could act as the strong resistance level. Further, momentum indicators like the Stochastic Oscillator and the Relative Strength Index indicate a strong possibility of some profit-booking at higher levels. Due to the temporary overbought situation, we may see range-bound activity in the near future,” says Amol Athawale, deputy vice-president-technical research, Kotak Securities.

Foreign portfolio investors (FPIs) have pumped in nearly Rs 25,000 crore so far this month, taking their buying tally since July closer to the Rs 30,000-crore mark. During the first half of calendar year 2022, FPIs had yanked out a record Rs 2.1 trillion.

Currently, the Nifty is 4.2 per cent below its all-time closing high of 18,477 logged on October 18, 2021. Analysts say if the Nifty is able to decisively pierce the resistance zone, it has a fair chance of making a new record high.

“On the weekly charts, the Nifty has gained for the fourth week on the trot, suggesting an ongoing bullish trend. Despite proximity to the trend-line resistance, the trend remains strong. A decisive break-out above 17,800 may encourage further rally in the market,” says Rupak De, senior technical research analyst, LKP Securities.