Excellent performance of the ruling NDA in the state elections ensured that Nifty opened with a huge upward 'gap' on Mar 14 and touched a new lifetime high of 9123 - just managing to cross above its Mar '15 top of 9119.
However, the index failed to close above the 9100 level and formed a 'doji' candlestick pattern that indicates indecision among bulls and bears. Today, the index touched a lower top and closed slightly lower - showing a lack of follow-up buying.
The daily bar chart pattern of Nifty is trading well above its three rising EMAs in a bull market. The 85 points upward 'gap' formed on Mar 14 is looking like an 'exhaustion gap' that can trigger a correction.
There are several signs of worry for bulls - both technical and fundamental.
All three daily technical indicators are looking overbought, and showing negative divergences by touching lower tops when the index touched a new lifetime high.
Nifty's TTM P/E has crossed above the 23.5 mark - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is in neutral zone.
Both WPI and CPI inflation are rising. WPI rose to 6.55% in Feb '17 - its highest level in three years - from 5.25% in Jan '17. CPI rose to 3.65% in Feb '17 from 3.17% in Jan '17.
Pent-up demand due to demonetisation can increase upward pressure on prices. RBI may be forced to maintain status quo on interest rates.
US Fed's likely interest rate hike announcement should boost the US Dollar index. That may induce FIIs to book profits.
Bull markets are supposed to climb a wall of worries. But Nifty has already climbed 1220+ points (15%+) from its Dec '16 low of 7894. It may be better to err on the side of caution.
Stay on the sidelines till there is clear evidence of follow-up buying that can take Nifty to a convincing close above 9119. (Note that Sensex is still 500 points short of testing its lifetime Mar '15 high.)