As the New Year kicks in, the dominant feeling on the Street is that of fear and caution. The domestic macro-economic situation does not appear to be very conducive for taking risks in equity; and the global scenario and news flow have been more negative than positive. Amid this gloom, equities in the domestic market are once again nearing attractive valuations, but for a long time now stocks have not attracted buying from either long-term institutional investors or domestic buyers despite being at attractive levels.

A look at the historical performance of the stock market shows the bottom of a market is formed six months in advance before the early signs of any improvement in the macro-economic situation start trickling in. Technical charts show after a long bearish phase caused more by an economic slowdown, the recovery is not a V-shaped one. Once the decline is over, a consolidation phase begins and that takes its own sweet time when de-rating and re-rating of stocks and sectors take place. It is only after this that a new bull market is born even if the bad news flow is still not over.

In case of the Indian market, it appears the decline is not over yet. So expect some more trouble with the indices before they go into a phase of consolidation. But all the above forecast is based on one assumption; that there would be no financial accident in the global market. If that happens, then surely the decline will gather momentum and the consolidation phase will be shorter in terms of time frame as valuations will get so compressed that the risk-reward ratio would turn dramatically in favour of those owning equity.

In such a situation, it would be worthwhile to reduce the level of trading and wait for the opportune time to take positions. The objective is preservation of capital, so that the same can be deployed at the right time in order to ensure maximum return over the next 12 months.

As far as the domestic market is concerned, the selling that has emerged on select sectors continued till the last session and it appears that the same would go on for some more time. But as volumes have been low due to the holiday season, it would be worthwhile to take a careful look at the market in the first few sessions of the New Year. If the selling from institutional investors continues, then surely this month is also going to bring more trouble for the bulls. But if no fresh selling emerges over the next few sessions, then we are likely to see a short-term bounce, as the market is technically ripe for a recovery. There are enough short positions in select sectors and a short squeeze will be very much in order. But what may come to the aid of the bears is the fact that the government has just increased its borrowing programme and this could give rise to negative sentiment and help the bears make some more money if global investors decide to press the sell button as what was being feared is now coming true.

As far as news flow from global markets is concerned, there was some respite as bond papers from Italy got subscribed at a lower rate. The fact that the market was expecting a sharper drop in rates and also that Italy has a huge load of debt that needs to be rolled over the next three months gave jitters to the market, which despite being in a holiday mood saw some selling pressure.

Over the next few weeks, it remains to be seen how news flow from Europe pans out, as it has the potential of disturbing the recovery process being seen in the US economy. This is very crucial as voices from the euro area have not been very cohesive; some indicate that the crisis will get over soon while others say it is just getting postponed and will blow up sooner or later.

As far as short-term indicators are concerned, they are all in sell mode as a majority of them have failed to cross into the positive territory. The moving average convergence divergence (MACD) on daily charts is placed in sell mode, as they have once again turned southward in the negative territory. The 14-day relative strength index has also turned southward once again as it approaches the oversold territory. Other extreme short-term indicators are placed in the oversold territory, but they have not indicated any sign of change in the ongoing bearish trend on the counter.

As far as support levels are concerned, the first support for Nifty comes at 4,540 level, after which another support exists in the 4,410-4,440 range. As far as resistance levels are concerned, 4,750 is going to offer tough resistance to Nifty in any short-term upward bounce, after which the index might find it tough to cross the 4,820 level in a hurry. Over the next five to seven sessions, the market should give a fair idea as to how it will perform during the first half of the year. zz

rajivnagpal

@mydigitalfc.com