High liquidity continued to help the bulls keep the market under control for another week in the absence of any major negative news flow. Till the time foreign inflows — which have seen a sharp rise over the past six weeks — remain high, the index will keep moving upward. And if the money keeps pouring in the same way over the next few days, it won’t be difficult for the benchmark indices to take off the strong resistance levels that most market participants are looking at as the next stop for the ongoing rally.

The essence of a sharp liquidity-driven rally is that once the liquidity gets over, the fall in the index is as strong as the rise, as the fundamental situation that the market tends to ignore at the time of high liquidity returns to haunt it.

In such a condition, the investors’ dilemma is that they feel left out if they do not buy into the rally, and they get exposed to a high risk of losses if they do. The best option in such a situation would be to invest in high quality names and stay away from so-called traders’ favour­ites, so that even in case of a sharp correction the damage to the portfolio is less.

In domestic new flows, the rupee continued to gain strength partly due to high FII inflows, and this helped market sentiment last week. This enabled a partial recovery in mark-to-market losses that investors suffered in their portfolios at the time of the sharp fall in the domestic currency.

The court order cancelling licences of many telecom players was negative news for the banking sector, as many banks have high exposure to these companies, and banking stocks did see a correction for a short while. But these stocks managed to stage a recovery in the absence of any clarity on the status of these debts.

As far as banking stocks are concerned, we could again see some volatility over the next few weeks whenever there is some clarity on the issue of their exposure to the telecom sector.

In case that clarity emerges when FII inflows are not too strong, we may see an extremely sharp correction. While FII inflows are going to decide the short-term trend of the market, the market outlook for the whole year would be decided by the outcome of the state elections and the union budget.

This year there will be high expectations for some policy action in the budget as the macro-economic situation has suffered more compared with other emerging markets due to slippages in deficits. So the Street will be expecting the government to initiate some fresh reform measures.

In case the budget is not up to the expectations of the Street, it is very likely to see a correction and even FII inflows might get affected.

As far as global markets are concerned, the ratio of good news to bad news continued to increase, which clearly showed that more sectors are getting stronger in the US and the extra liquidity that the European Central Bank has thrown into market is helping some of the banks to once again go for riskier assets.

On technical charts, short-term indicators are either placed close to the overbought territory or have already entered this area to keep moving in sideways direction. The moving average convergence divergence (MACD) on daily charts is now placed in buy mode as macro patterns are indicating further bullishness. Even on weekly charts these indicators are now in buy mode, though they are still placed in the negative territory.

The 14-day relative strength index (RSI) is placed in buy mode in the overbought territory and it is moving upward in the equilibrium territory even on weekly charts.

Other indicators have signalled overbought condition, but they have not given any sell signal. After so many attempts, Nifty has been able to cross the downward sloping trend line drawn from the high of October, 2010. While this trend line has been broken, the filter levels required for any breakout to be valid are yet to be cleared. Nifty should stay above the 5,300 mark for more than three sessions and also in the subsequent correction for it to not fall below this trend line. The ongoing upward trend of Nifty would face the first resistance at 5,440 after which the 5,570 level is where some selling could emerge due to profit booking.

As far as support levels are concerned, Nifty is close to its previous high. So there is a possibility that we would see a correction and a double-top formation. If that happens, the first support for Nifty would be a minor one at 5,290, after which 5,214 will be another support level.

If the 5,200 level is broken, we might see Nifty come to 5,050 level. Investors should avoid the temptation of buying low-priced stocks as the feeling of having missed the rally might get strengthened further when Nifty gains more weight.

rajivnagpal@mydigitalfc.com