Volatility to remain at elevated levels
Short-term indicators point to more strength to the up-move begun on Friday

Finally, two sessions of  the past week showed some convergence between the Nifty and the broader market. On Wednesday and Thursday, the benchmark index declined—the decline were tradeable in nature—and the broader market breadth was also headed south.

Otherwise, the Nifty had been outperforming the broader market for the past few months largely driven by a handful of stocks. To understand what is happening to the market, remove four stocks from the Nifty—HDFC Bank, HDFC, RIL and HUL. Had these stocks seen the kind of decline other stocks were having, the Nifty would have been struggling below the 10,000-mark by now. In a way, Nifty traders are living in a different market compared to the rest of the investors and traders grappling with a falling market. But the Nifty traders have to remember that if the broader market remains weak for long, eventually even large-caps are going to come under pressure.

Last week saw an unusual upward movement in the mid-cap space. But remember that such excesses happen not just in upward direction, but in southward direction as well. Perhaps, the market has not yet reached a stage where we can say excesses are being committed in the southward direction. So, do not compare the recent highs and jump into buying stocks that look cheap.

As for news flow, it was another week of news creating more confusion than impact in the market. The trade war—or posturing—between the United States and China created tremors in the financial markets. Unlike in the last few years, when what the Federal Reserve said and did were taken in stride by the currency markets, this time, the currency markets have got involved in the trade war as emerging markets currencies declined across the board. The latest round saw the Chinese currency slipping, thereby, accelerating the emerging market currency retreat. The rupee, on an intra-day basis, touched an all-time low against dollar. The relationship between the rupee and the stock market is quite direct. Money from hedge funds, for whom currency movements are extremely important, may not come into the market till the dollar index gets stabilised. Probably, the first indications that the market is ready for another round of upward movement would come from the currency markets this time.

So, have one eye on the rupee and another on the US treasury yields, as the yields have started to flatten. If they flatten more, we might have some respite.

Most short-term oscillator charts are in the sell mode but have not yet broken the support levels, which would have indicated further trouble for the bulls. The moving average convergence/divergence (MACD) on the daily charts is in the sell mode and is placed on the equilibrium line. In the recent past, this oscillator had taken support on this line and moved up again. The pattern could be repeated this time as well.

The 12-day rate of change (ROC), which has slipped into negative territory, has once again turned upward and is showing similar patterns as in mid-May when the Nifty had witnessed a trend reversal—a rally which lasted through the second week of June. So, if one goes by the short-term indicators, there is hope that this round of upward movement, which has begun on Friday, has more strength in it. But as that up-move was made on the first day of the start of a new series, and short covering had a role in it, this up-move probably needs more confirmation. This confirmation will come if both the market breadth and the Nifty stay in positive territory in the first two trading sessions.

Coming to short-term support and resistance levels, the first resistance to the Nifty would come at 10,820, from the trend line which can be drawn from the index’s all-time high in January. If the Nifty makes an attempt to break this trend it would be the third bid in the last two months. After this another resistance awaits the index at 10,930. If it clears this level, then probably another round of short squeeze might happen.

The Nifty would get the first support at last Thursday’s low of 10,560, and if that is broken with strong volumes, the index would move towards the sub-10,400 level as that would bring momentum to the southward direction.

Since there are a good number of short positions in the market at this time, any positive development on the macro front, like a decline in oil prices, could act as a trigger for an up-move in the Nifty. But will that spill over to mid- and small-cap segments on a sustained basis is the question?


Rajiv Nagpal