Finally, the sharp crack that technical indicators had been signalling for a long time appeared on the Nifty charts last week, and the reason for that fall was a mistake or an unintended trouble caused by the Union budget. But the fact is that the indices did fall sharply and completed the first target of the downfall, which started in February.

The macro-chart patterns are still weak, which indicates that it is better to be cautious and traders should not take large long positions in anticipation of a sharp V-shaped recovery. It is very likely that we might see some consolidation before Nifty makes an attempt to move upward once again, and that attempt will be met with a lot of resistance.

This attempt to resume a strong directional move upward can take Nifty anywhere between a few weeks to a few months, but during this time the risk of sharp cuts in individual stocks remains high. Especially, the chances of such an accident are very high in the mid-cap segment, where a stock could shed more than 50 per cent of its weight.

The long positions built in stock futures ahead of the budget are more or less over. Especially last Thursday’s long rollovers to the March series were very low, and traders either reduced or squared off their positions due to margin pressure.

The Union budget came as a sigh of relief for the market, as it was not a populist one, which is usually the case ahead of an election year. That is why till the time the confusion over the FII tax issue surfaced, Nifty was doing fine even after the budget speech got over. The trouble with the confusion created by a section of media over the tax issue was that it caused sharp losses to traders due to panic selling and those traders will now take a lot of time to recoup those losses and make a comeback. So it is very likely that some of quality mid-cap stocks could see range-bound consolidation before they make an attempt to move upward once again.

With the budget behind us, the Indian market will once again begin to enjoy a higher correlation with what happens in the global equity markets. Traders should watch carefully how the events pan out in Italy over the next couple of weeks and how they impact the stability of the euro region.

Given the fact that both the US and European markets are sitting with large gains achieved over the past five months, global equity markets are likely to see a sharp crack if there is even a whiff of trouble in the euro zone. If that happens, it will have a negative impact on the emerging markets, including India. It is very likely that Nifty will witness more volatility in mid-afternoon trade over the next few weeks due to the unfolding scenario in the European markets.

As far as momentum indicators are concerned, they are now placed in clear sell mode, and they have moved further southward in the negative territory.

On the daily charts, the moving average convergence divergence (MACD) has slipped further southward into the negative territory and it is still far away from its old support level from where it had reverted in the minor correction witnessed over the past eight months. On the weekly MACD charts, which throw light on the medium-term trend of Nifty, the average and trigger lines have further diverged from each other, indicating a high probability of longer time-wise correction.

The 14-day relative strength index (RSI) is now placed in sell mode, though it has come closer to the oversold territory, but it has still not signalled any change in the ongoing trend of weakness. Even on weekly charts, this indicator is placed in sell mode as it has slipped southward in the equilibrium territory.

Other short-term indicators are now placed in the extreme oversold territory. But just being in the oversold territory is not an indication of change in the current southward trend. At times, when the short-term indicators reach the oversold limit, it might trigger a short-covering bounce.

If the short-covering bounce is weak, then it would indicate that more sellers are waiting to sell stocks. And once the buying due to short covering is over, more selling will come and that will take the prices further downward.

Despite the sharp fall seen on Thursday, it appears Friday’s short-covering was lacking conviction. However, before jumping into any conclusion, we would suggest traders to keep a watch on the next two trading sessions. If Nifty does not see a sharp rebound, then it would increase the possibility of a fresh round of selling in the later part of the week.

With regard to support levels, 5,630 is a strong support for Nifty, from where a bounce can happen due to profit booking by the traders, who have short positions. zz

rajivnagpal@mydigitalfc.com