Expect consolidation before next move
MACD has given a buy signal on daily charts, moving up from negative zone

Finally, after a gap of two months, market participants had got a rally that was tradeable through overnight positions. For three sessions, buying the intraday dip proved the right move and traders who had showed the courage made decent money. But it is not yet known who led the rally, the bears or the bulls?

From the way the market moved up and the open interest in derivatives shaped up in out-of-the-money options in both call and put options, it was clear that the bears, who had been sitting on neat profit, had decided to take some profit off the table. The bears tend to book profits when they feel that the prevailing negative news flow is not good enough to push the prices southward, and will take more bad news to do so.

The good part of the rally last week was that even the mid-cap stocks had joined the march with large-caps. Also, the market welcomed good corporate earnings with cautious optimism, instead of ignoring them. The rally was kicked off with ICICI Bank earnings. An improvement in the bank’s numbers indicated that probably the worst is over for some segments of the economy. Also, it is becoming clear that a considerable part of the money stuck under the Insolvency and bankruptcy code (IBC) proceedings would now be coming back to the banks and consequently many provisions made in the past would get reversed.

On the macro front, a cooling off in oil prices brought some relief to the market and it particularly buoyed the stocks of companies which benefit from lower crude oil prices. Another positive was the country’s leap in the World Bank’s ease of doing business ranking. This ranking may not have a short-term impact, but it is a long-term positive for the economy, especially in terms of attracting capital.

International news flow, especially from the US, had nothing which could have had a direct impact on markets. But the global markets, particularly the US market, turned very volatile. Some observers have started questioning the sustainability of the nine-year-long upward movement and valuations in the tech sector. This probably is the biggest red flag the Indian market will have to deal with over the next couple of months.

The Middle East brought some good news, as it appeared that sanctions on Iran would not be so strong as was being expected and that was good enough for crude oil to slip and the currency market to rejoice, helping the rupee to gain back a level above 73 to a dollar.

Positive surprises in earnings came from unexpected sectors like capital goods. This probably indicates that some sectors using those capital goods could show better numbers in the coming quarters.

Coming to charts, short-term indicators have given buy signals as they move up from oversold territory. In many cases, these signals have come as positive divergence in them, visible from the week before last, getting strengthened.

The moving average convergence/divergence (MACD) has given a buy signal on the daily charts, as it moves up in negative territory. Its movement into positive territory will give a bullish signal and a confirmation of the trend will probably coincide with the index moving above its 200-day moving average (DMA). On the weekly MACD charts, though the oscillator is placed in the sell mode, the average and the trigger lines have started to converge, indicating the possibility of a buy signal emerging.

On the weekly candle stick charts, a bullish engulfing pattern has emerged, which needs to be confirmed by another white candle this week. So, even from a medium-term perspective, it is important to see how the market behaves this week.

Coming to short-term support resistance levels, another upmove should take the Nifty to 10,650, the level from where it had turned southward recently. After this, resistance would come in the range of 10,750 to 10,800, created by some of the long-term moving averages. If the index crosses this level and starts to consolidate, most probably we might see another round of short squeeze, which could push the Nifty above the 11,000-mark.

As for support levels, the Nifty should not break the 10,320 range in a consolidation move, which the index might see as it catches breath after a five per cent up-move.

rajivnagpal@mydigitalfc.com

Columnist: 
Rajiv Nagpal