The strong southward movement in the indices on Friday came as a wake-up call for those traders who had assumed that the Indian market was going to remain in outperformance mode compared with other emerging markets and there

was not going to be any major correction.

Now, it remains to be seen whether this was one of the many corrections that the

market has seen over the past four months or it has the

potential to take Nifty below the 5,000 mark.

There is a marked difference in the correction we saw on Friday from the many corrective moves that the market has been witnessing every now and then, when Nifty lost about 100 points or so from its high.

In all earlier cases, the corrections were triggered by a fall in global markets. But on Friday, there was no major problem in global markets. The Asian markets were doing fine and European markets were not trading with heavy losses, yet the Indian market witnessed

a sharp fall in the last one hour of trade.

Normally, when a correction happens as a result of profit booking by traders, it comes in the middle of a derivative series. But on Friday, the September series had just started and the market saw a strong correction. When a correction comes in the first trading session of a new derivative series, it is generally stronger in nature and lasts longer.

Secondly, the cabinet approval to the Direct Tax Code (DTC) was a major development last week and this can have far-reaching impact on the market. For, when DTC is implemented, it is going to increase the tax liability of some foreign institutional investors (FIIs). As a result, some of the long-only funds — which are sitting on huge profits following the strong outperformance of the market in the past one year — will now be tempted to book profit before the tax law changes as they face huge tax outgo in the DTC regime.

Also, some of the companies that have strong weightage in the indices face higher tax liability due to an increase in minimum alternate tax under DTC. This will impact the performance of these companies, and some of them, especially companies from the IT sector, may underperform the broader market over the next few months due to strong selling by some of the overseas funds.

Friday’s fall was precipitated by profit booking on some of the banking counters, which had witnessed a sharp rally in the past few weeks. If banking sector stocks continue to see selling pressure the way they have seen in the recent past, then the correction may become sharper.

In none of the previous corrections that the market has seen over the past three months, did Nifty move below its 20-day moving average. Every time, it took support on this average and moved above it to form a higher top.

But on Friday, Nifty moved below this average and now this average is going to offer resistance to Nifty at 5,450 level. The technical indicators of Nifty too have come into sell mode as they moved southward once again.

The moving average convergence divergence (MACD) on the daily charts has given a sell signal as the average and trigger lines once again diverged from each other. However, on the weekly chart, this oscillator is still in buy mode. The 14-day relative strength index (RSI) has given a sell signal as it moved southward from just below the overbought area.

The first support for Nifty will come at 5,360 after which the next meaningful support exists at 5,276. If Nifty breaks this support, then we may see it slip southward to 5,150 level.

As far as resistance levels are concerned, the first resistance will come at 5,460 after which 5,490 is another point where the index is going to face a strong roadblock. In Friday’s correction, it appears mid-cap stocks were the ones that bore the brunt of the selling pressure. So traders and investors who trade in mid-cap stocks should be cautious in taking aggressive long positions.