After a rally of around 7% in Nifty 50 from September lows; is it the right time to go short?

Since the lows of September 2022, Nifty 50 have rallied around 7%. So, is it the right time to go short? Let’s find out.

Since it bottomed down around 16,950 in the second week of October 2022, the benchmark Nifty 50 index has been on a roll. Since then, the index has been climbing, and on Friday it reached a high of 17,838.6, which is shockingly close to the peak reached on September 21, 2022, when it reached 17,838.7. So, technically, this level is proving to be a formidable resistance.

Also, bears are making a move in the area around 17,800, which is why the index was unable to close above this level despite many attempts. Since the previous four straight sessions (including Friday), the index has reached a high within plus or minus 40 of the 17,800 level but has yet to close above it. So evidently, a barrier is forming around this zone.

There hasn't, however, been a short-selling signal as of yet. Although the index is under pressure from higher levels, the decline has not yet begun. You might think of it as a tight battle between the bulls and bears that have kept the index from moving since October 24, 2022. So, when is it appropriate to take a negative stance on the index? There are several approaches, and I will briefly discuss three of them below.

An uptrend or downtrend structure is one approach to looking at the market. The uptrend should be considered intact as long as the markets make higher highs and higher lows, at least until this pattern reverses to a lower high and lower low. On an hourly period, the October 25, 2022 low of 17,637 is now the low below which the trend shift would occur.

Waiting for the Nifty to cross below its rising trendline support is another approach for determining the start of a downturn. Presently the trendline is extremely acute, representing a strong climb of the rally that is often not sustained for long, thus it is expected to be violated in the next couple of days.

Waiting for the breaking of the low from the previous day is one of the most aggressive strategies. When the rise has been relatively sharp, this method usually works effectively. It may produce a few false signals because it is the first to enter, but if proven correct, this short signal from the very top will also produce higher earnings.