Bank Nifty's Winning Streak at Risk as Overbought Conditions Reach Extreme Levels - Is a Reversal Imminent?

On Tuesday, the Bank Nifty index continued its winning streak for the sixth straight day, however, it managed to eked out modest gains. 

The index ended the day nearly 130 points down from the day’s high. It formed a bearish candle as the close was lower than open along with an upper shadow, which indicates profit booking at the higher levels. It opened with a positive gap and traded in just 214 points range.  

All the indicators have reached an extreme overbought condition. After six days of rally, Tuesday’s price action shows exhaustion in the trend. Now, the Bank Nifty is just 600 points away from its all-time high. The 14-period daily RSI has reached an extremely overbought zone. The MACD has crossed the last December's high. The expanded Bollinger bands also show an overbought condition. Momentum is also waning. The index is trading 5.89% above the 50DMA, which is also the highest after December 2022. 

The distance from the average shows the over-extension of a trend. As the Fed meeting is scheduled, the global markets are trading deeply negatively, and our market may trade nervously. In any case, a gap down opening and closing lower is nothing but a reversal sign. The evening star candle will get its bearish implications. A move below the level of 43269 is negative, and it can test the level of 43000 on the downside. Only above the level of 43484, the bulls might regain their power. It is better to avoid aggressive positions. 

Strategy for the day

The Bank Nifty is showing signs of exhaustion. It closed below the opening level and near the day low. A move above the level of 43450 is positive for the index, and it can test 43589. Maintain a stop loss at the level of 43376. But, a move below the level of 43270 is negative, and it can test the level of 43040. Maintain a stop loss at the level of 43376. Below level 43040, continue with a trailing stop loss.