A volatile week gone by in the Indian markets saw Nifty reaching a new record high of 14,753 points. This was also backed by positive global cues and quantitative easing by major central banks. But derivatives’ data shows that the index is over extended and the chances of a corrective move are pretty high.
Analysts are suggesting that market participants should avoid chasing up moves from here on and look for consolidation at lower levels.
As seen from the daily chart, Nifty has created a ‘spinning top’ pattern near the all-time high. A spinning top is a doji-like candlestick, that indicates weak market sentiment as the buyers and sellers seem to be in a dilemma.
The momentum is gradually weakening which could see prices going into a consolidation in the coming days.
Further, open interest in the futures and options segment have increased from Monday’s levels. This increases the open interest to some 20.7 crore shares as compared to 15.22 crore on Monday. This implies that most market participants are closing their positions leading to increased volatility.
One technical indicator that shows the potential for a trend reversal in the near-term is the Relative Strength index (RSI). On the daily chart, the RSI has hit overbought territory in the overbought of 87. A reading of above 70 indicates that the index is in overbought territory and a level above 80 shows an extreme overbought level.
From a technical perspective, it clearly hints at a corrective phase for the market as prices witness a downward move.
Apart from the technicals, there are certain fundamental factors that weigh on the markets, as well. This includes the rising Covid-19 cases in the country and the ongoing political crisis in the Middle East in which U.S. President Donald Trump has threatened to impose sanctions on Iraq.
To conclude, the market is showing signs of exhaustion near the all-time high which might result in a corrective phase in the near-term. Investors therefore, should avoid chasing up moves and look for consolidation at lower levels.