Consolidation continues
Most short-term charts are in the buy mode

Though it was a short trading week, the festive season could bring cheer to the Street, and to mid-cap investors. On most sessions, the market breadth of the mid-cap segment was better than large-caps’. In one session, the mid-cap indices moved into the green zone ahead of the Nifty.

The Indian market outperformed other emerging markets on Friday as crude prices , the biggest hurdle on the macro front, cooled down, falling below $70 a barrel on Friday, the first time since April.

While the whole of Asia was trading with deep cuts, the Nifty somehow flirted with green territory. With the decline in crude oil price, the rupee also stabilised, which allowed some foreign money sitting on the sidelines to come to the market. If the oil price stays close to the current levels or decline a bit, the currency would get stronger and reach a level where hedging premium, which had seen a spike in the last couple of months, would come down and that would indicate confidence in the rupee over the medium-term.

The earnings season saw PSU banks maintaining the trend of the previous quarter, with a decline in gross non-performing assets and in some cases, a decline in the net NPA also. Better numbers helped the banking space to aid the Nifty’s upward movement. While there had not been a runaway rally, bank stocks largely stayed in positive territory and also lent support to the market on days it stood on a shaky ground.

In international news flow, the US mid-term election results were on the expected line. With the Democrats gaining the upper hand in the House of Representatives, it would be interesting to see whether that country would witness a political showdown or not. If a confrontation happens, then tax cuts, a key reason behind the US market’s outperformance, could come under scrutiny, which in turn could bring volatility. Since political showdowns cannot be predicted, traders will have to hedge their positions to take care of overnight volatility. The cost of hedging would also go up.

Coming to oscillator charts, most of them are in the buy mode as they continue to gain more strength, though the pace of build-up of strength has come down. The moving average convergence/divergence (MACD) on the daily charts is placed in the buy mode, as it moves up in negative territory. Its test of strength would come when it comes closer to the equilibrium line. If it moves into positive territory that would be a bullish signal. At this point, the difference between average and trigger lines is not high, which means this oscillator would take more time to move into positive territory. This is an important signal because its movement from one territory to another had indicated the end of corrective phases inthe past.

The 12-day rate of change (ROC) is in positive territory and is still in a bullish mode, moving up without any indication of negative divergence. This is usually the first oscillator to show divergence. If it is not showing divergence, it surely is not time to think of taking a short trade, even if the market opens slightly lower on Monday.

Extreme short-term oscillators are placed in overbought territory as they once again move in sideways direction without showing any signs of change in the current trend of consolidation.

Coming to short-term support and resistance levels, the first significant resistance to the Nifty in its current phase of up-move would come in the zone of 10,750 to 10,850. A clutch of medium- and short-term moving averages, the resistance giving averages, are now visible in this space. If the Nifty crosses this zone with a large bullish white candle, that would trigger further short covering, which would take the Nifty close to the 11,000 range, from where a southward movement had started in the first week of October.

The first support to the Nifty would come at 10,450. If this level is broken, the next support would come in the range of 10,300 to 10,350. More than the exact points, what needs to be watched is if the support level is broken with strong southward movement that started after overnight gap-down and if a long black candle is formed. If the first support is broken with force, the second support level may also get broken, putting the index under heavy pressure.

Rajiv Nagpal