The upward trajectory has been driven by a consistent sector and segment rotation, moving from large-caps to mid-caps and small-caps, keeping the broader markets on a high.
The Nifty Alpha 50 and the Nifty Next 50 have seen remarkable performances, with over 40% returns year-to-date (YTD) as of 15 October, and the Nifty Smallcap 250 is up by 31%.
Can this rally continue further?
A cautious undertone is beginning to creep into market sentiment. At Definedge, we have developed a study called DeMAP (Definedge Momentum & Performance Chart) designed to gauge the momentum and performance across various segments. The DeMAP chart now flashes warning signals, urging bulls to exercise caution.
Warning signals on the horizon
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What is a DeMAP?
Definedge Momentum and Performance (DeMAP) is a comprehensive market analysis tool developed by Definedgethat allows traders to assess market conditions at a glance. It integrates popular studies such as price analysis, momentum indicators, relative strength, and various charting techniques like Point and Figure, Renko, and candlestick patterns. The DeMAP structure is divided into two parts: Sky and Water. Stocks above the zero line in the Sky are represented as stars, signalling bullish momentum, while those below the zero line in Water are shown as circles, indicating bearishness.
When analysing the DeMAP chart, one concerning observation emerges: The slope of the major sectors is sloping downward. This decline is visible across the broader market indices, including the Nifty500 and the Nifty Midcap 150.
What’s particularly worrisome is that the Nifty Smallcap 100 has slipped into negative territory. This shift suggests profit-taking and distribution—typical precursors to market corrections.
In technical terms, when momentum begins to wane and distribution patterns emerge, it often signals a transition from buyers to sellers, resulting in a broader market sell-off. The cautionary signs we see now reflect the potential for deeper market cuts in the near future.
Broader market sell-off: A growing concern
Adding to the caution, foreign institutional investors (FIIs) have been selling heavily since the beginning of October, with a net outflow of ₹63,874 crore. This persistent selling pressure is exerting a downward force on the broader market.
While domestic institutional investors (DIIs) have stepped in with a net buying spree of ₹61,725 crore in cash, the question is: How long will retail investors hold the line?
The real concern centres around the behaviour of retail investors, particularly those invested in mutual funds. Will they panic and trigger the dreaded exit button?
Historically, market sentiment has often shifted rapidly once fear begins to take hold. While the sentiment on Dalal Street has moved away from greed, we have not yet seen fear fully dominate. If fear does grip the market, we could witness another round of corrections, possibly leading to a drop in the Nifty50 and profit booking in the Nifty Next 50 and eventually to the broader markets.
There’s no denying that market sentiment is delicate. After such a prolonged bull run, many investors are understandably apprehensive. A sentiment shift from greed to fear is often gradual but, once it takes hold, can be swift and brutal. The retail exit could exacerbate the correction if the broader market continues to show signs of weakness, especially in small- and mid-cap stocks. Mutual funds, which have been a pillar of retail investment, might see outflows, adding further pressure on the market.
The Nifty500 at a crossroads: Bulls vs bears
The Nifty500 is a broader market index representing a diverse range of stocks from large-, mid-, and small-cap segments. This broad market coverage makes it a valuable barometer for understanding the market’s overall sentiment and performance.
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On the weekly chart, the Nifty500 displays a clear higher high, higher low pattern—a bullish pattern, according to the Dow Theory. Additionally, it is positioned above both the 20-week exponential moving average (20WEMA) and the 50WEMA, indicating strong short- and medium-term momentum.
However, while these bullish signs are encouraging, a deeper analysis reveals reasons for concern, particularly in terms of the relative strength index (RSI). The RSI is a momentum oscillator that often signals shifts in market strength and sentiment. Currently, on the chart’s lower panel, the RSI has slipped below its previous low of 62, which raises alarm bells. This shift indicates a potential weakening momentum despite the continued uptrend in price action.
But, the divergence and fear of history repeating is what scares me.
When the Nifty500 hit the high of 24,573 (highlighted by a green arrow on the chart), the RSI failed to confirm this new high, a traditional bearish divergence signalling that the strength behind the rally might be waning. Since then, the RSI’s slip below the previous low of 62 further underscores the possibility that the bulls may be running out of steam.
Historically, this pattern has not boded well for the index. A similar breach of the previous RSI low occurred in 2023, which resulted in the index falling below its 50WEMA, currently sitting at 21,265.
However, all is not lost for the bulls just yet. One encouraging sign comes from the Doji candlestick pattern that formed last week. Dojis often signal indecision in the market and can precede a reversal in trend, depending on the subsequent price action. The low of this Doji candlestick, at 23,089 and 20WEMA at 23,007, are important levels to watch. For bulls to retain control and resume bullish momentum, it will be crucial for the Nifty500 to hold above these levels.
A bullish hope amid caution
While the current slope in the DeMAP presents cautionary signals, D-Street will need strong inflows and a few positive news breaks to restore sentiments and confidence.
Let’s hope the market continues its upward march, and we may have a brighter Diwali, but be prepared for whatever lies ahead. After all, as much as we all love the bull market, the markets have their own rhythm—and it’s our job to follow its beat, not fight it.
For more such analyses, read Profit Pulse.
Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
As per Sebi guidelines, the writer and his dependents may or may not hold the stocks/commodities/cryptos/any other assets discussed here. However, clients of Definedge may or may not own these securities.
Brijesh Bhatia has over 18 years of experience in India’s financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C. Mehta, and Edelweiss Securities. Presently he is an analyst at Definedge Securities Broking Pvt. Ltd.
Disclosure: The writer and his dependents do not hold the stocks discussed here. However clients of Definedge may or may not own these securities.
