Index Goes Into A Squeeze - Medium Term Upside Appears Heavily Capped
Last week, the bellwether index remained stuck in narrow zone as stock prices struggled to reconcile the whirlwind rally that has already taken the NIFTY to extremely rich valuations.
We can look to some important technical cues that suggest the near-term direction of the market.
First, the index formed a short-bodied candlestick pattern on the monthly charts. This indicates that the tussle between the bulls and bears is evenly marched at the moment, and something is bound to give quite soon.
Secondly, we’ve witnesses a massive and sudden narrowing of the Bollinger Bands over the past three weeks. This phenomenon, known as the “Bollinger Squeeze”, typically happens right before a large fluctuation – that is, either a strong breakout or a breakdown. These squeeze patterns can last for extended periods of time, but are invariably followed by a powerful one directional move. The last time the NIFTY went into a squeeze was between October ’19 and March ’20; and we all know what happened after that.
Thirdly, we are witnessing sustained resistance every time the index hits the upper Bollinger Band. The index hit the upper band in early June, and has failed to make a decisive breakout above the band for the past 4 weeks.
Two things become clear. One, the near-term upside is extremely limited, so new lump sum investments are highly discouraged. Two, a dramatic correction may be unlikely because of all the liquidity that’s still sloshing around. So, waiting for a huge pullback in order to invest is a suboptimal strategy too. In fact, we may witness a Bollinger squeeze that may last several weeks or even months.
It’s a testing time for investors. Take some profits off the table and maintain a disciplined asset allocation. Stagger fresh investments via long-term (15-18 month) systematic transfer plans. And be patient and realistic – don’t expect blockbuster returns from equities from this point on.
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