Book profit in over-valued stocks at current levels

By Jay A Thakkar

Where we are: The Nifty has closed in the negative territory in the last trading week and it’s as also closed below its 200-day moving average (DMA), which indicates that the bears are back and the probability of a reversal is quite high. The breadth has shifted in the favour of the bears as well. The index has reversed from 50% retracement of the previous fall which was our short- to medium-term target.

What is in store: The index has now broken the 200DMA as well, which is another confirmation of a trend reversal. With this bounce, the index has completed the right shoulder of the bearish headand-shoulder pattern, which is a bearish reversal pattern. The neckline of the pattern is the initial target, hence for the short term, the target for the Index comes to 10,050 levels whereas the resistance or reversal is pegged at 10,941 levels. If the Index breaks 10,050 levels then much lower levels will be seen as the break and close below 10,050 levels will confirm the breakdown from the bearish head and shoulders pattern.

What could investors do: The ‘Wave C’ down seems to have ensued and so the traders are advised to trade cautiously as the volatility is likely to increase. The traders are also advised to trade with a negative bias till the evidence proves that the trend has reversed from down to up. As of now, the reversal level on the upside is pegged at 10,941 levels whereas the target comes to 10,050 levels, hence the risk to reward ratio is more than 1:2 on the short side. Investors can book profits in those stocks which are overvalued at current levels and wait for an opportunity once the market completes its downward cycle.

The author is AVP-Technical & derivatives research, Anand Rathi Share.