After a massive run in the Nifty Major Indices over the last three weeks, Wednesday we got our first sign of waning enthusiasm and a key inflection point to trade against.
Here we’re looking at the Nifty 500, which printed a bearish engulfing candle…gapping up and then being sold the entire day to close on the lows (below the previous day’s range).
Along with this, momentum is diverging negatively, which signals that buyers could be exhausted in the near-term when combined with this candlestick pattern.
Click on the chart to enlarge view.
Since the March lows we’ve seen a number of these candles emerge, and each time they led to some sort of pause in the uptrend. Given how extended prices are from a flat 200-day moving average and that momentum is diverging, we’d not expect this time to be any different.
And what would invalidate this short-term cautious view? New highs in price and momentum across the major indices.
For now though, protecting profits by raising stops and respecting our price targets remains prudent. As always, we only want to be entering new positions where our risk is well-defined and reward/risk is skewed in our favor, which we’re not seeing a lot of after this month’s rally.
There’s a time to press and a time to be patient. Now is a time to be patient.