For yet another week, the Nifty had remained range-bound, but with underlying volatility. On Monday, the index slipped and ended the session at the day’s lows, only to recover the very next day and cover almost all the lost ground. Even in a bull run—that is, when the Nifty breaches its 200-day moving average (DMA)—the index tends to stay below the DMA for some time. The last four years had seen phases where the Nifty stayed below its 200 DMA for months on end.
But the current phase, in which the Nifty stays below its 200 DMA, is really painful for traders, because if one goes strictly by the rulebook, we are in a bearish market. If any security or index is trading below its 200 DMA, it is considered a bearish phase. When the index is bearish, stocks tend to get even more bearish. Since most traders have a tendency to trade with a bullish bias, they find it tough to find a trade in a bearish market. That is why any trader would tell you s/he is hurt more by lack of trading than anything else, as mark-to-market losses would anyway have to be incurred.
The news flow last week was positive, as crude oil prices dipped sharply. But it is surprising that the market reaction to it was rather measured in contrast to the Street’s panic reaction to the rising oil prices. In fact, the currency market was more responsive than the equity market, considering that the rupee came above the 72-level last Thursday.
This is an indication that earnings, which are still to catch up with valuation, are likely to become an issue in the coming months. So, traders should be prepared for stock-specific volatility with a negative bias in the days ahead.
In the international market, Brexit pangs led to short-term volatility in the pound against the US dollar. The currency market’s reaction to any fresh development in Europe needs to be watched. If there is another round of volatility, it could come to emerging market currencies as well.
Also, reports have indicated that the US and China might smoke the peace pipe on trade issues. If they make progress towards this, probably some of the beaten down metal stocks could see a spike. But what might spoil the metal party is voices from some central bankers that the global growth is cooling off. That is never good news for metal stocks.
Coming to short-term charts, most of them are in the buy mode and have still not crossed the level from where they tend to face resistance. The moving average convergence/ divergence (MACD) on the daily charts is in the buy mode, but the average and trigger lines are still placed below the equilibrium line and the ratio between them is still not strong enough to say they would be taken off the resistance giving line. This indicates that we might see consolidation before seeing any fresh strong up-move.
The 12-day rate of change (ROC) is currently placed in positive territory, but it has started to show feeble signs of negative divergence. This divergence is not enough to warrant an aggressive short, but surely every long trade needs to be covered with a put option or should have a stop loss.
Coming to short-term support and resistance levels, the Nifty is now placed right below its 200-day simple moving average, which is placed at 1,0691. So the Nifty first needs to cross this level with a large white candle in a day or two and stay above it for more time for any sort of panic to hit the bear camp. As of now, since the Nifty is placed below this average, traditionally a trouble point for the bulls, there is no urgency in the bear camp to cut their short positions. Rather some fresh shorts would be added under the assumption that the Nifty won't pass this level. But once this level is crossed, resistance, by way of profit booking, is going to come around the level of 10,900, as 11,000 would once again act as a resistance to the market. As for as support levels, as long as the Nifty does not slip below 10,490, any fresh pressure with momentum is unlikely to come.