Bulls waiting for vote

Small investors and traders should wait for a correction to enter the market or to increase exposure for the long term

Bulls waiting for vote
Finally, Nifty took the first step last week to move out of a trading range and looked ready to go for a strong directional move upward. This performance of the Indian market once again brought it in line with its other Asian peers. The first part of last week’s rally was due to short covering. For a large part of the November series, Nifty was unable to move up and at every level one or the other sector was dragging it down southward, though the pace of the decline was slow. This had led to the creation of short positions both in Nifty, bank Nifty and some of other interest rate-sensitive stocks.

With no negative news flow or delivery-based selling by FIIs, the bears were reluctant to carry forward their short positions. To add to this, Goldman Sachs upgraded its target for Nifty and Sensex just ahead of the expiry of the November series, which made the bears jittery and the resultant short squeeze triggered the first leg of the upward movement.

The second leg of the rally was due to political developments. With the government agreeing to go for a vote on FDI in retail, there was fresh hope on Dalal Street that Parliament will function this time and some crucial bills will get cle­ared. Once these bills are pas­sed, some of bottlenecks will get rem­oved and several sectors will be ab­l­e to attract more foreign inflows.

In September, when the government announced the opening of the retail sector for FDI, the stock market had seen a strong improvement, but soon after many questions were raised on whether the government would be able to finally implement the decision as issues like amendment to the foreign exchange management Act (Fema) cropped up.

If the move allowing FDI in retail crosses the hurdle of Parliament vote, then there will surely be another round of strong inflows to the country. That could be one of the triggers, which will help Nifty cross the 6,000 mark.

So the ensuing week becomes extremely important for traders and investors, as any negative news flow will lead to selling of long positions that have been built over the past two months.

The undercurrent of optimism in the market was reflected in the outperformance of the mid-cap index, which rose sharply last week. This indicates more investor participation and improves the breadth of the market, which is extremely important for the market to sustain the strong directional move.

With regard to the trouble in Greece, which gave jitters to global markets the week before last, things appear to have settled and chances are there will not be any major threat to new inflows to the equity and money markets from the European Union over the next couple of months. This means inflows into emerging market assets are likely to remain healthy.

Coming to technical charts, the short-term indicators are now in clear buy mode and the medium-term ones, which were close to giving a sell signal at one point, have turned the corner once again. The moving average convergence divergence (MACD) on daily charts is in buy mode and it has been able to go back to the positive territory, which is a bullish signal, though it needs to cross the filters to confirm the longevity of the trend.

On the weekly MACD charts, the average and trigger lines — which were about to give a sell signal — have once again diverged from each other. If they move further apart, then it would give a fresh bullish signal.

The 14-day relative strength index (RSI) continues to move up in the equilibrium territory. Similarly on the weekly charts, the indicator is moving in tandem with Nifty. Other short-term indicators have moved up and a number of them have entered the overbought territory, though they have still not given any sell signal.

With regard to support and resistance levels, Nifty is likely to face resistance at the 6,050 level and that would come more due to profit booking by traders than anything else. If Nifty is able cross that level, which it should do easily if the outcome of Parliament vote is favourable, then the next resistance would be in the 6,180-6,200 range. Now that can lead to a sharp rise in Nifty, banking stocks and some of the capital good stocks, which are showing stre­ngth on their individual charts.

As far as support levels are concerned, if the market sees a correction after a sharp rise, then we expect 5,700 to become an important support. But if the correction starts this week without any further spike, then it is very likely that Nifty will breach the trendline and move below the 5,500 mark over the next couple of weeks.

In such a situation, small investors and traders should wait for the correction to enter the market with a long-term perspective and increase their exposure to mid-cap stocks. Some of the quality mid-cap stocks are likely to give better returns than large-cap stocks, which have already gone up quite a bit over the past few months. zz

rajivnagpal@mydigitalfc.com

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