Consolidation before next major move
Sep 25 2016
The average and trigger lines on the weekly MACD charts are converging but a reverse trend is happening on the daily charts. In the past, such divergent trends led to corrections in the Nifty
The market breadth points to profit-booking and distribution in the mid-cap space. On Friday, mid-cap stocks came under selling pressure more than the Nifty. This raises the prospect of mid-caps coming under heavy pressure in any short-term corrective move. Hence, it will be better for traders and investors to track their mid-cap portfolio independent of the Nifty’s moves, and take a decision to book profit or stay with them based on their individual valuations.
As usual, the US Federal Reserve has postponed the rate hike again, but not before giving an indication that a rate hike could follow in December. But, did the market took the Fed statement seriously? The answer is no. There was hardly any cross-currency move that could have indicated a flow back of money to the home country. This means that the Fed effect will be minimal on the market in the short-term, but at the time, when a rate hike does happen, there would be far more volatility with a downward bias. In such a situation, two things are important for traders: regular booking of profit; and putting trailing stop loss on all trailing positions.
The domestic news flows were positive for some sectors; the Sebi’s relaxed guidelines on REITS should make this investment vehicle more attractive and help the fund-starved real estate and infrastructure sectors and their troubled lenders.
Coming to oscillators, the medium-term weekly charts have been consistently turning week. The average and trigger lines on the weekly moving average convergence/divergence (MACD) charts are converging and are about to give a sell signal. But on the daily charts, the same charts are moving in the opposite direction and are about to give a buy signal. In the past, such divergent trends led to corrections in the Nifty. Since the long-term trend remains bullish, a correction now will be limited to range-bound moves. The only difference is that upper and lower ends of the trading range could become wider.
The 14-day relative strength index (RSI) is placed in equilibrium territory, as it moves in tandem with the index. The other short-term indicators are placed close to oversold territory and are trying to move up again. While some of them have given a buy signal, the negative divergence appeared on them are yet to fade away. What comes as a relief for the bulls is that despite all the sell signals and divergence, the Nifty’s corrective moves are happening in a broad, range-bound mode. The probability of an upward breakout is high after a broad, range-bound move.
Coming to short-term support and resistance levels, on Friday, the Nifty was unable to cross the high it had touched on Thursday. In the extreme short-term that level will become a trouble spot for the Nifty. The index should cross the 8,890 range on a closing basis for it to make an attempt to cross 8990. It is important to take note of what is leading that crossover; if the up-move is led by both IT and banking stocks, it could prove sustainable. Once the Nifty crosses 8,990, the next resistance would come in the range of 9,160 to 9,200, where some profit-booking pressure would emerge.
As for the support level, the first support for the Nifty would come at 8,780, after which 8,650 is another support range, and if this range is broken on a closing basis, that would spell trouble for the bulls. The expected deep correction could probably come at this level. Broad, range-bound moves could also be possible at this range, if the bulls are lucky.