Nifty is witnessing profit-booking in intraday trade on August 18 which is on expected lines; technical indicators are showing Nifty has been rising relentlessly and a mild correction is imminent.
For example, the momentum indicator RSI shows Nifty RSI was at 83.69 on August 17, which means the index is in the overbought zone.
The Relative Strength Index, or RSI, is a momentum indicator that measures the speed and change of price movements of a scrip. RSI oscillates from 0 to 100. A scrip is said to be in an overbought zone if it breaches the level of 70 while the scrip is considered oversold if it falls below 30.
Should you be cautious?
RSI is an important momentum indicator which shows if a stock is overbought or oversold. In case of an overbought situation, a scrip mostly witnesses some correction to keep the valuation at a reasonable level.
However, one should not panic just because RSI is showing stock in the overbought zone.
"One cannot go short simply because RSI is into the overbought zone. It suggests, at markets are at the highest point of the current rally and traders as well as investors need to be cautious while adding long positions," said Amol Athawale, Deputy Vice President - Technical Research, Kotak Securities.
"Our advice is to reduce weak long positions or leveraged long positions. As per valuations, the markets are at 19.5 times FY 24 EE (earning estimates). In the best-case scenario, the market could move to 22 times the earnings, otherwise in normal circumstances, it remains between 16 and 22 PE Bands," said Athawale.
Some profit-booking, in fact, is considered healthy which removes the froth from the market. As of now, analysts do not see a reason to worry on the technical charts.
"Though Nifty is placed at the swing highs, the underlying trend remains up and there is no indication of any reversal pattern unfolding at the highs. Having placed above the important trend line resistance of 17,900-17,850 levels, the Nifty could eventually scale higher after a consolidation or small downward correction," said Nagaraj Shetti, Technical Research Analyst, HDFC Securities.
Shetti believes as long as the crucial support of 17,720 holds in the next few session, we could possibly see another round of upside which could pull the Nifty near 18,600 in the coming weeks.
"Normally, during sharp up-trended movement in the underlying, the RSI more often hovers around its overbought region of 80-85 levels. Minor dips in the underlying result in a moderate decline in the RSI, which allows the indicator to turn up from the higher lows. Hence, the RSI reaching an overbought region though signalling minor cautious approach, but it is not a reversal indicator." said Shetti.
Santosh Meena, Head of Research, Swastika Investmart also said it is not necessary that we will see a major fall but some consolidation or minor pullback can't be ruled out that will help to cool off the overbought value of RSI. On the downside, 17,700 will be the immediate support level while 17,500-17,400 is a strong demand zone at any pullback, said Meena.
However, in case Nifty falls below 17,750, one can consider shorting Nifty.
"If the Nifty breaks below 17,750 on a closing basis, traders can short with a target price of 17,100 and a stop loss of 18,100. Nifty is trading at a PE of 21.42, a premium value on the earnings front, compared to the average PE of 20.33," said Rahul Goud, Research Analyst- Equity Research, CapitalVia Global Research.
Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.