Bloomberg

Gaining strength: There is no doubt that short-covering played a major role in the rally, which we witnessed in Friday’s trading session. But it appears that the present upward trend has more strength in it

After slipping southward for the first four trading sessions of previous week, the last hour of Friday's trading session gave the bulls a fresh lease of life. However, whether the short-term rally is sustainable is the big question.
There is no doubt that short covering played a major role in the rally witnessed on Friday. But it appears that the present upward trend has more strength in it.
The last time the market was slipping, it was delivery-based selling from foreign institutional investors (FIIs) that was responsible for the sharp slide in the market. This time, while selling by FIIs continues, joining the sellers' bandwagon consists of retail investors, who have been selling call options and taking short positions on Nifty. As we approach the closing of the November series, these short positions are going to be covered, leading to higher volatility in the next few trading sessions.
News flow from the international market holds no hope for the bulls. In the previous week, there was some hope of positive news flow as far as the international markets are concerned. On the contrary, news flow on Citigroup hurt the markets worldwide.
On the domestic front, the news flow has been bad, with huge layoffs in the infotech sector as well as some other sectors. There are expectations of a cut in interest rates in the next few weeks. This is helping public sector banking stocks an
out-performer in the broader market.
Besides the global uncertainty that the market will witness due to international developments, the approaching general elections will also add some market uncertainty. The moment the state election results are announced, we may witness a correction. Only when this phase of political instability is over, shall we witness any decisive move in the market.
Till the previous week, there was a tussle between the bulls and the bears. Every time the Nifty has come to the level of 2800, it has witnessed a bounce-back. This indicates that the bears are also tending to book profits around the 2800 level. But the moment Nifty moves below this level, there is a sharp decline. In the current upward movement, which started from the 2650 levels, the Nifty is going to face resistance from short-term moving averages, which are now placed at the level of 2,863.
If Nifty is able to break this resistance-giving average with a better market breadth, then we will witness a very sharp rally in the market. And, this time, the rally is going to be much sharper, catching most people unawares.
Coming to the oscillators charts, the moving average convergence divergence (MACD) on the daily charts — which was on the verge of giving a 'sell' signal — has once again turned into 'buy' mode, though it's still placed in the negative territory. On the weekly charts, these oscillators are still placed in 'sell' mode, as they drift further into negative territory.
The 14-week relative strength index is now placed in the oversold territory, but has started moving upward. This oscillator has started giving the first indication that after some time, a positive divergence will appear on this chart.
The long-term oscillators continue to stay in extreme oversold territory and are still far from giving any sort of 'buy' signal. These long-term oscillators are the last ones to give a 'buy' signal. Their reaching the extreme oversold territory is an indication that the market will now react much less to any negative news flow.
The Nifty once again moved above its five-day moving average on Friday. It had been providing resistance to Nifty in the past few trading sessions This average, which is now placed at the level of 2,865, is now going to be the short-term support for Nifty. After this, the next support for Nifty comes at the level of 2650. In the upward direction, the first resistance for Nifty is going to come at the level of 2,863.
If Nifty is able to move above its two important resistance levels and close above 2864, than a short squeeze might lead Nifty to touch a high of 3,200.