Feeble signals give no clear trend

After a couple of weeks of break in which it appeared that the selling pressure in mid-caps was over, the segment once again came under pressure last week. But most of the pain was not captured by the indices. No was it reflected in market breadth, since only the ratio of stocks that have risen and declined is counted in market breadth calculations.

So, if relatively more number of stocks rise, it is considered positive market breadth and vice-versa. But this fails to reflect the damages caused to individual stocks in price terms. If 60 per cent stocks are declining and 40 per cent rising, the kind of damage suffered by the 60 per cent—be it 2 per cent average decline or 7 per cent— is seldom factored in. The same is true for stocks that end up in the green. It doesn’t matter whether they notched up 1 per cent gain or 5 per cent gain.

Last week, the issue was not that the market breadth was negative, but the cut in individual stocks was much higher than usual. Higher cuts are indicative of delivery-based selling, which means time-wise pain is going to be more than before. So, before taking long exposure in mid-cap stocks, traders should be prepared to pay a good amount of mark-to-market losses now.

Domestic news flow had

nothing that could have impacted the market, except that concerns are being raised whether or not the RBI would go for an aggressive rate raising cycle. This could make some sections of the financial sector to under-perform. In the international

market, the key issue was what would be the Opec decision on oil production during the weekend. The Opec has decided to raise production by a moderate 1 million barrels per day, which would effectively mean 600,000 bpd as some countries

won’t be able to raise production to the assigned level. Anyway, this will not have much impact on the current trend in oil prices.

Short-term oscillators are more or less in the same shape as in last week, not going in one direction. The average and the trigger lines on the daily moving average convergence/ divergence (MACD) charts have again come close to giving a buy signal as the chart makes another attempt to turn upward in positive territory. On the short-term time-frame ADX charts, a crossover has taken place on Friday, which needs to be confirmed in the next few sessions to know whether this up-move has more leg in the Nifty. The 12-day rate of change (ROC), which has taken rest on the equilibrium line, has once again moved up, indicating a minor bullish bias. The extreme short-term indicators, which had turned south in equilibrium territory, have once again turned upward and are about to enter overbought territory, which is again a minor bullish signal.

Most short-term moving averages which had converged in southward direction have made their first attempt to change direction and are repeating the formation made in late May, which means volatility may spike in the next couple of days.

Coming to short-term support and resistance levels, the Nifty is placed right below the downward sloping trend line drawn from its record level in January. If there is a gap-down opening on Monday or the Nifty slips by the end of the day, this trend line would become a trouble spot. So, how the Nifty moves in the first two  sessions becomes important to assess its trend. As long as the Nifty stays above 10,660, traders should not lose their sleep over the support level, as only a close below that would bring back the bears into a short-term game.

The first resistance to the Nifty comes at 10,950 points, after which 11,090 is another resistance range, which the index needs to cross for the momentum to come back in upward direction. Traders have to watch if these resistances are cleared on a closing basis rather than on an intra-day basis, because volatility in the week of expiry of contracts can take Nifty to levels which have no meaning.


Rajiv Nagpal