Consolidation with bearish bias on play
Oct 17 2016
When extreme short-term indicators stay close to the oversold zone or move in and out of that frequently, it is a bearish indication, which raises the probability of more pain
A two percent correction in indices is not an unusual event. But the difference is that in the past, such corrections had happened over a visible reason. Last week, the decline was not related to any event and the Indian market underperformed other markets. On days when European and Asian markets were trading in the green, the Indian market was trading in the red. While such divergence for two days does not mean a lot, it does indicate an underlying profit-booking mood of the market.
As expected large-cap IT companies delivered subdued numbers last week, but their stocks did not come under sharp pressure. In fact, short-covering was seen in some IT stocks. This is important, because IT stocks had often been bringing pressure on the Nifty, but now the probability of IT pressuring the Nifty looks remote. At the same time, IT stocks are unlikely to contribute to the Nifty’s ascent any time soon. So, we might see market attention shifting from IT stocks to other stocks. On the macro front, inflation numbers were lower but that was on expected lines; the RBI had earlier indicated that we might see some softening of food inflation.
In international events, data from China showed a slowdown in exports from there, essentially underlining the point that the global economy is not in the best of health. In such an environment, whether the US Fed will take the risk of raising its policy rates is a question that would weigh heavily on both currency and equity markets. Also, this could lead to reduced fund flows to emerging markets.
Last week, in this space, it was mentioned that since the earnings season was starting and mid-cap stocks had made good gains, it would be better for traders to take some profits off the table. The corrective move of last Thursday further confirmed that hypothesis, and it would still be wiser for traders to book profit as this season might see more volatile moves with a bearish bias.
Most oscillator charts are placed in the sell mode and they have not taken support on levels where they turned around in the past. The moving average convergence/divergence (MACD) has, on the daily charts, slipped into the negative zone, which is a bearish indication. That’s not the only bad signal for the bulls. Even on the weekly charts, MACD has given a sell signal, though it has yet to cross the test zone and the average and trigger lines have not yet diverged much.
The 14-day relative strength index (RSI) is placed in the sell mode as it continues to slip south in equilibrium territory. Similarly, the extreme short-term indicators are in the sell mode as they re-enter oversold territory. When these extreme short-term indicators stay close to the oversold zone or move in and out of that frequently, it is a bearish indication, which increases the probability of more pain. But the moot point now is whether that pain will come as range-bound correction or as a sharp fall. It appears the correction could take the form of a broad, range-bound dip, in which a downward sloping channel would get formed.
Coming to short-term support and resistance zones, as the Nifty has already moved below its important 50-day moving average, the first resistance in any upmove will come at 8,705 points. The next resistance would come at 8,768, from the downward sloping trend line, which can be drawn from the high the Nifty had touched early this month. The Nifty has already done five trading sessions with a downward bias. Normally, a bounce is witnessed after five sessions. Now, what would be the quality of that bounce back is something which traders need to consider before taking any long position. If the market breadth is positive and the up-move is sustained in the second half towards the market close, there is high probability that up-move might be sustained.
Coming to support levels, in the current move, the Nifty could get support at 8,480, after which a significant support range would come between 8,330 and 8,360. If this range is broken, the Nifty will be taken to the lower of the trading channel, which brings support at 8,240. It is time for retail investors to shift back their focus to quality large-cap stocks.