Consolidation with a bullish bias

Tags: Derivatives

The first short term support for the Nifty comes at 9,125, after which technically a more important support comes at 8,925

Once again, the market remained in a no-news-is-good-news mode and gains at the index level were nothing to write home about. But the real strength of market was visible in the mid-cap and small-cap segments. Mid-caps formed a new high last week and this has made people to feel more bullish about the market compared to phases where select large-caps lifted the indices up.

But investors have to be cautious in the small- and mid-cap space. Greed is taking over in this space, some mid- and small-cap stocks having major corporate governance issues, at both balance sheet and promoter levels, are quoting in high double digits.

Stories galore in the media about how the fortune of a company has changed or will change in the near future. Justification is the new mantra of the market. When rationalisation becomes the market’s mainstay, it is better to be cautious. The last 20 years had seen at elast five such phases where justification—through media, brokerage reports or even communication to exchanges—ruled the market.

This is not to suggest that the Nifty won’t move up from here, or equity as an asset class will not do well. Only that investors and traders have to be sure of the quality of a stock before taking an investment decision. No compromise should be made in terms of the management and balance sheet quality of a firm.

The US earnings season is expected to start on a positive note. It is widely expected that the growth and stability seen in macroeconomic numbers are now going to be visible in corporate numbers as well. In normal course, this should be taken as a sign that the US bull run has more steam. But in the last few days, doubts have again sprung up over passage of taxation reforms in the US Congress. The movements in US 10-year treasury bond yields also point to pessimism over the reform’s fate. Will the US market correct in the near future? If a correction happens, it will very likely spread to emerging markets as well. So, once again, after a gap of almost seven months, it would be worthwhile for traders to give due weight to happenings in the US market.

In the domestic market, the RBI policy announcements came largely on expected lines, though the 25 bps hike in the reverse repo rate, which indicates that the RBI is keen to take care of the excess liquidity in the banking system, came as a surprise. Notably, some banks have indicated that they might reduce the lending rates by a few basis points.

The negative divergence is getting more pronounced on some oscillators. The average and the trigger lines on the daily moving average convergence/divergence (MACD) charts have once again converged and are placed close to each other, giving an indication of them coming into the buy mode. But the trouble is that such buy and sell signals have been coming at regular intervals and divergence has been getting stronger on the charts.

The 14-day relative strength index (RSI) is placed close to the overbought territory and this is also showing negative divergence. In technical theory, there is something called a divergence trap. It happens when a sharp up-move in index or stock wipes off all the negative divergence on a chart, but a correction suddenly starts in underlying stock. Though this has not started on the Nifty yet, it has been happening quite frequently in individual stocks. Traders are advised check the charts of index heavyweights for indications of negative divergence and, if it is there, have stricter stop loss.

The first short-term support for the Nifty comes at 9,125, after which technically a more important support comes at 8,925. These levels would be breached only in the event of a straight fall in the index in the next few sessions. If the index stays in a narrow range for the large part of this week, then it is unlikely that it would come to its second support level.

As for resistance, 9,270 remains a strong resistance level for the Nifty. The index has to break this range on a closing basis for any upward momentum to gather pace. The strength of its upward momentum would depend on what is driving the rally. If the index is taken up by just two or three index heavyweights, the momentum might not sustain. In contrast, if the upward movement is led by both banking and IT sectors, it will likely sustain.

rajivnagpal@mydigitalfc.com

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