Is NSE Index Flashing a Bearish Run?

The NSE has undergone two corrections since we started this year on a bullish note. As of this write-up thee, the index is down by 4% on a month to date, after delivering 5.32% in January 2021. The question you may likely want an answer to is, are we back to the bear you had earlier talked about since the index become overbought?

Following 5 days of successive bearish move and 1.96% drop today, let’s quickly look at the NSE index on the monthly chart and key risks that will drive the NSE to the south.

The index is now at the key resistance region of 40,000 – 44,000 basis point with RSI already overbought. Technically, this may not be the best time to accumulate equities (except you understand sector rotation, an investing strategy that requires re-allocation of fund from overbought sectors to others that are recovering from massive sell-offs) but take profit on stocks that have appreciated significantly.

The index on the monthly chart may be flashing an emerging bearish run ahead of a possible rate increase in the second half of the year. But I think we still have another brief rally that will be powered by high-yield dividend stocks after the year-end results of bellwether stocks are announced. So, my take is that as long as the 20-day MA is above the 50-day, this might just be a normal pullback that may find support at the psychological 40,000 basis points.

From the chart above, I think a close below the 50-day MA will signal the beginning of a long bear. But for now, the index is still bullish as long as the benchmark rate remains low and CBN’s restrictive policies are in place, hence renders fixed income market unattractive.

Going forward, I think it’s best to play the recovery approach by buying stocks that have been beaten down significantly in the last 1 year.