Market is in overbought zone

Yes, I feel like markets zoomed too much in the wake of excess liquidity flowing in terms of FIIs, DIIs & somewhat retail investors(recently, when they started feeling left out in the present rally) due to various reasons like sound fundamentals, good earning seasons, cheap valuations & etc.

But does all the reasons support a rally from 2600 levels in Nifty to above 5000 levels, that is more than 90% return in period of mere 6 months.

Here I am not going to discuss any fundamentals today, technically markets are in overbought zone according to many chart indicators which I have given above.

In above chart you can see that RSI(Relative Strength Index) & Stochastic are above 80 levels & slightly feeling sluggishness on these levels. And these are the main(particularly RSI) are pre-indicators for the markets' conditions on both the cases (overbought & oversold).

Here I am not saying that market will start correcting immediately, but correction is in due. It may happen from 5250-5300 levels if not immediately because that is the level when markets started sliding more aggressively in April 2008. You can see that in the below chart.


If you see the 1st chart in first week of June 2009 RSI started sliding from overbought zone, i.e. above 80 levels but markets moved further up for couple of days. But after that they corrected from 4700 levels to 400o levels. And in one more case similar to this is 1st week of August 2009 RSI gave the hint and profit booking took place from 4750 levels to 4400 levels. And it applies to Stochastic also which is similar to that of RSI but little bit complicated. And in 2nd chart you can see the decrease in the volume recently.

So here I am advising not go long(buying) in the present conditions. But as I said above, I not advising going short(for F&O players) also on Index immediately. So for traders its okay to take positions on either side(since they track regularly & exit with little bit loss if needed by not minding) but for short & medium investors I would advise to wait for markets to get correct and then start accumulating good bets.

Now question comes, if markets corrects(IF is the big question mark here) then what is the level to enter back into the markets. Thats the million dollar question!

At present condition I dont know, that's why I am not exiting my longs in solid bets & but I have started exiting from other counters(which I believe not blue chip or high beta or whatever you call).

May be 4700-4800 levels are the starting points for getting back into the markets if markets corrects to that level.

Bottom line:

Personally I dont think/want/expect markets to corrects to below 4500 levels (as solid consolidation has taken place 3-4 times during these 6 months period @ 4500 levels) but markets are always right, so go with the markets...