Time to take some rest

Tags: Stock Market

Stocks may bounce on poll outcome, but such a rally will be shortlived as weak macros will catch up fast

Time to take some rest
With one major event out of its way, the equity market should show some initial reactions to the state election results and then settle and look for more economic news than anything else. If one looks at the historical track record of the market, sudden and sharp market movements before and after such non-economic events do not last long. The market reverses its course after some initial reactions. It is best to avoid the temptation of going for a trade on the assumption of some benefit coming to one company or one sector.

Last week when the results of various exit polls were announced, Nifty opened with a sharp gap up on Thursday. But the gap-up opening in bank Nifty was much bigger and bank Nifty was able to sustain at a higher level for a longer duration when the broader market was seeing profit booking.

This sort of dominance partially means the continuation of a trend that the market has been witnessing over the past few months, where bigger moves in banking stocks on either direction have decided the fate of Nifty. But more than that, Thursday’s strong move in bank Nifty was also an indication of a major underlying trend, that foreign investors are fully programmed to play the India story through banking stocks and this trend is not going to die anytime soon. In fact FIIs are now keener on bank Nifty than Nifty itself. This trend may continue till the general election next year and even beyond that.

It is clear that large institutional investors, especially foreign investors, do not wish to take exposure to individual stocks or groups even if they are bullish on the broader India story, because it adds an element of unnecessary risk to the investment.

What will be more important for the Indian market over the next few weeks is how emerging markets react to the numbers from the US that came out on Friday after the Indian market had closed for trading. If emerging markets react negatively, then it would impact the market more than political expectations.

Over the last four weeks, some of the infrastructure stocks have gained sharply from their lows. We suggest traders who have missed the bus not to jump on to these counters at this point. The time to enter these counters will come when a bout of profit booking takes place on them.

Also, it would be better for investors to have a long-term view on these stocks and put in only that amount of capital that they won’t require any time soon.

Coming to technical charts, most of the short-term indicators are now in the buy mode, as they have moved upward from the equilibrium territory. But the strength that is visible on these charts before a strong directional move seems to be missing. A buy signal has emerged on the daily moving average convergence divergence (MACD) chart, as it has taken support on the equilibrium line. But the pace at which the divergence should take place between the average and trigger lines is missing at this point.

On the weekly MACD chart, this indicator is placed in the buy mode, as it continues to move upward in the positive territory. The 14-day relative strength index (RSI) is now placed in the equilibrium territory and is moving in tandem with Nifty. A similar trend is visible on the weekly charts too. The extreme short-term momentum indicators are placed in the buy mode and a number of them have entered the overbought territory.

Coming to support and resistance levels, in any upmove Nifty has the first resistance at 6,355, which was its previous all-time high. After Nifty manages to cross its all-time high mark, we may see some resistance due to profit booking at the 6,450 level. In case of a southward move, it would largely depend on where the decline begins — will it be from Friday’s level or after Nifty crosses its all-time high level. In case the correction starts from its present level, then the first support will come at 6,040 after which another support exists at 5,930 level, where Nifty may take some rest before witnessing any strong directional move.

Another important factor that traders should keep in mind is which trigger is making Nifty move upward. In case banking stocks and bank Nifty are the main reasons behind the bounce in Nifty, then one has to be cautious before taking any long position. For bank stocks saw a bounce on Thursday but the broader market indices didn’t show similar enthusiasm. Also banking stocks were clearly seeing selling pressure at higher levels, and along with them Nifty was also shedding weight. There is a high probability that there will be a repeat performance of this in case Nifty moves up due to a select few stocks.

rajivnagpal@mydigitalfc.com

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