Both and index surged to an all-time high on Friday as the broader rally continued the up move. The trend is extremely bullish and no short opportunities are materializing as every dip gets bought by investors.
Despite a strongly bullish outlook, traders should also note that it is difficult to make new long positions here from the risk-to-reward perspective. On Friday, the index inched up, majorly by the support from the IT space. The index was the top-performing index for the day, gaining a sizable 4.45% to 30,945.5.
In Sensex, the top 5 gainers on Friday were all IT shares, with TCS (NS:) leading the rally with a 5.13% uptick. I suspect amid this sharp move, the IT space might take a breather this week which if happens, then the IT-led rally won’t be able to support more. Also, if you plot RSI (daily, 14) then the current reading of 73.3 indicates an overbought condition.
Image Description: Daily chart of Sensex (spot) with RSI at the bottom
Image Source: Investing.com
But as the trend is super bullish, traders need to wait for some weakness to play correction in the bull run. The current trend-following system I trade is indicating a weakness below 65,246 (spot) which is around 814 points down.
Extremely aggressive traders who cannot wait for an 800+ point correction to initiate short positions can wait for the RSI sell signal, i.e. the reading falling below 70. This RSI strategy might work well because of a bearish divergence on the daily chart. This divergence is marked on the chart above, which I consider one of the best indications of a trend reversal.
However, one drawback of divergences is – they do not work in a strongly trending market, either up or down. Therefore, risk management should not be thrown out of the window when taking a short trade in this bull run.
Another trigger for a short trade could be a break below the rising trendline support (see the chart above). As soon as the stock breaks this support, some selling pressure can kick in.
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