For more than 12 months now, all categories of investors have been suffering; the only difference has been the degree of suffering. While investors of mid-cap companies suffered more in the initial part of the bear phase as mid-cap stocks took a plunge, the decline in the indices over the past one month bled even those who thought holding blue chips was the best way to survive in times of trouble in the global economy.

But the way volatility has panned out over the past couple of weeks has even caught traders on the wrong foot and volumes have come down sharply. The gap-down and gap-up openings of the market are one of the biggest reasons why volumes have come down in the cash market as well as in stock futures.

Volumes rose sharply in the options segment as most market men preferred to play the indices through options instead of taking exposure to stocks where share pledges by promoters had been creating headache for retail investors as a number of companies saw distress selling of shares by lenders. But will this trend continue or is it just a passing phase?

It is very likely that this trend will continue over the next couple of quarters till the time earnings numbers show clear signs of stability and improvement. As far as domestic news flow is concerned, there was no major positive development on the macro front, though inflation numbers are showing the first signs that they are going to fall due to a higher base effect.

The political impasse over FDI in retail continued and it remains to be seen whether the government is able to take this important step further. The government stand on this will send out a signal as to whether there will be any further reform moves in the foreseeable future. Coming to news flow from global markets, though the fundamental situation in Europe remains the same, yield on the debt papers of PIGS countries remains high. In case of Spain and Italy, the yield clearly indicated that the financial markets do not have any faith in the papers issued by these countries. But the coordinated action taken by five central banks globally was something that bought in a sigh of relief. For, some of the artificial strength that the US dollar had due to the technical drying up of dollar liquidity vanished instantly. The relief was reflected in the way debt paper of France was subscribed at a rate much lower than what the Street had been expecting.

What matters for the euro zone is the result of the forthcoming summit and whether it will be able to bring in some worthwhile solution to the crisis. Otherwise, the holiday season would kick in and the uncertainty over the fate of the countries that are joining the queue of potential spoilers of the euro as a currency would linger on for some more time.

Coming to technical charts, a large number of them have come into buy mode all of a sudden due to the gap-up opening of the market in Thursday’s session. Whenever such buy signals have emerged in the past, there have been a sharp rise in short-term volatility. This time again, there is a higher probability of a rise in volatility, given the macro formation on these charts.

The moving average convergence divergence on daily charts has once again given a buy signal, though it is still placed in the negative territory. On weekly charts, the MACD and the average and trigger lines have converged, though they are still far from giving any buy signal. The 14-day relative strength index (RSI) is now placed in buy mode as it has moved upward very sharply. It is now placed in the equilibrium territory.

Even on weekly charts, this indicator has once again turned upward from just above the oversold territory. Other short-term indicators are placed in buy mode and some of them have signalled overbought condition. But they have still not given any sell signal. The sharp upward move of the short-term indicators is an indication of strength, but when this upward move is due to a gap-up movement, the strength on this oscillator cannot be taken on the face value. Over the past couple of months, the gap-up and gap-down moves have led to false signals on the short-term technical charts.

Coming to resistance and resistance levels for Nifty, the first worthwhile resistance would come at 5,110 level where the index would complete 61.8 per cent retracement of the decline that it has witnessed since late October. After this the next resistance would come in the 5,182-5,220 range. If Nifty is able to cross this with good market breadth, then it would meet its strongest resistance at 5,346 level from the downward sloping trend line which it had not been able to cross over the past one year and also the upper trend line of the channel in which Nifty has been moving in the ongoing bear phase. Coming to support levels for Nifty, the first support would come at 4,945 after which another support exists at 4,861. These two important supports should not be broken for the current upward move of Nifty to gain more strength and also for any probability of this trend changing into a medium-term upward trend. The macro patterns on these charts are indicating that Nifty is likely to gain more weight over the next few sessions before it faces any resistance at a higher level.

rajivnagpal@mydigitalfc.com