Bloomberg

boiling under: Looking at the trend of last one month, it is evident that only crude oil shocks are most potent weapons for bears. Even the Reserve Bank of India is of the view that we are not far from the peak as far as the rate of inflation is concerned

On the face of it, the Indian market has lost ground last week with Nifty losing as much as 103 points. But India has still managed to outperform equity markets in Asia and developed countries. On days when most Asian markets, ex-Japan, saw declines of more than 2 per cent, the Indian market was able to close almost without any loss. This clearly indicates that at lower levels not only value buying is emerging, but bears are also not very aggressive in going short on the market.
Looking at the trend of last one month, it once again becomes evident that crude oil price is the most potent weapon for the bears. Even our central bank is of the view that we are not far from the peak as far as the rate of inflation is concerned. The only thing which could spoil this hypothesis is a sharp rise in oil prices, which can make inflation peak at levels higher than 13.5 per cent, which the market is expecting it to touch.
Last week saw bears making a strong hit on sectors like banking and real estate. On Thursday, we saw two large long-only funds selling baskets of large-cap stocks. This led to sharp declines in frontline counters. The same evening, most of the Indian ADRs also saw high volumes and declines to same extent. Normally, this is an indication of strong delivery-based selling.
After any sector witnesses delivery-based selling, it takes a lot of time before it stages a strong recovery. Effectively, banking and real estate are going to remain under pressure for the next few trading sessions. Whatever recovery these stocks might see is going to be due to short covering by domestic traders, who are holding short positions.
Coming to the oscillators charts, the short-term oscillators are in the ‘sell’ mode. Some of them are already placed just above the oversold territory while others have given a 'sell' signal. The moving average convergence divergence (MACD) on the daily charts has given a 'sell' signal though it is still placed in the positive territory. In case it moves into the negative territory, it will send a strong bearish signal. Last time, a similar signal had appeared on the MACD chart along with a bearish pattern on the bar chart, and Nifty lost more than 800 points. The 12-day rate of change has moved into negative territory, which is again a bearish indication.
On weekly MACD charts, the average line has just been able to cross the trigger line, which is a bullish indication. But at the same time, they have not diverged from each other, indicating prevailing uncertainty in the market. If a strong 'buy' signal emerges on this chart, it will be a bullish indication and we might see Nifty pass across its tough resistance of 4600 in the next few months. In case it fails, which would be very clear in the next 10 trading sessions, than we are going to witness a sharp correction.
The bearish signal, which had appeared in the previous weeks, gained strength last week. The trendline, which was giving support to Nifty in its upward from 3790 will now give resistance during its attempt to move up.
Coming to the support and resistance levels for Nifty, the most important support level comes at 4165. If Nifty breaks this level, than the higher top and bottom formation, which it has witnessed from mid-July, would fail. Than even the intermediate bottom of 3790 would come under threat.
In the upward direction, 4450 is a strong resistance. For Nifty traders, who are holding short positions, 4450 is a crucial mark. Short positions should only be covered if Nifty is able to close above this. If Nifty is able to cross this level, than a short squeeze may take Nifty to 4580 level.
Investors should be ready to see volatile trade in next few trading sessions.