While there was no major positive news flow on the fundamental front, this past week surely raised some hope that 2012 will not be as bad as previous years. The prime reason behind the short coverings in the initial part of last week was that the bears, who had been in control of the market for the past one month, decided to take some profit off the table.

Sectors that led the decline in December, such as banking, were the first ones to see short covering and this added strength to the market. There was increasing ho-pe on the Street that the Reserve Bank of India (RBI) will cut policy rates sooner than later and it will help bring growth back on track. If one looks at the broader market, even beaten-down mid-cap stocks saw not only short covering, but there was also some cash-based buying. This was clear from the higher delivery-based trading figures on some of these counters.

We have mentioned in this column earlier that as FII flows are not expected to arrive too fast this year — which had been the case in previous years and which is why not much front-running used to be done on mid-cap stocks — there is a possibility that we might see a minor rally on mid-cap counters, thanks mainly to the extremely low valuations that some of the dividend-paying stocks have reached over the past few weeks.

The trouble with a short-covering rally is that whenever it is over, we are likely to see a sharp decline and that is what traders and investors should be aware of given the macro-economic situation, which is not showing any sign of improvement at this point of time.

This was what happened in the market in Friday’s session. The moment short covering got over on the banking counter, Nifty once again slipped downward very sharply. The news flow from global markets was positive as far as the US market is concerned, and the macro situation showed an improvement as jobless numbers were better than expected.

But what concerned India more was the rise in oil price after tension escalated between the US and Iran. In fact, there was a sudden rise in oil prices globally at the same point of time last year after the uprising in Arab countries, which dashed all hope of a fall in inflation in the domestic economy. Given the state in which the rupee stands at present, any rise in oil prices is going to lead to increased macro-economic trouble for India.

As far as the European situation is concerned, the next summit that takes place this week is not going to provide any major relief, but as expected there was a rally in European markets ahead of the summit despite the fact that Germany was not able to raise funds through bond auction the way the Street had expected. When a strong economy like Germany faces trouble in raising cash, it clearly shows that the trouble is far from over as far as the euro zone is concerned.

Coming to technical charts, the short-term indicators are now in sell mode as they have once again moved southward. However, this time the number of oscillators that are showing a positive divergence has increased, which indicates that in case Nifty forms a new bottom, it would be followed by a sharp trend reversal. The average and trigger lines on the weekly moving average convergence dive­rgence charts are once again converging with each other as they get ready to give a sell signal. This sell signal would emerge after a double-top formation on price charts, and a confirmation of this can spell fresh trouble for the bulls.

On weekly charts, these indicators continue to be in sell mode and they are not showing any sign of change in the ongoing bearish trend on Nifty. The 14-day relative strength index is moving in sideways direction in the equilibrium territory, and despite making a number of attempts to give an advance breakout signal by crossing the downward sloping trend, it has not been able to do so till now. On weekly charts, this indicator is in sell mode as it continues to slip southward in the equilibrium territory. Other short-term indicators of Nifty are in sell mode as they once again moved southward in the equilibrium territory.

After the short-covering bou-nce, Nifty had been moving in an extremely narrow range, but a range-bound movement cannot continue for long, and this has to break out in either direction over the next few sessions. In case Nifty crosses the resistance that is faces from a clutch of resistances the moving averages are giving at 4,800 level, then we may see it move upward and test the 4,900 level. If that level is crossed, then a short squeeze may make Nifty touch even the 5,100 level over the next few weeks. As far as support levels are concerned, the first support for Nifty in the ongoing move comes from the extreme short-term support level at 4,620. If that support is broken, then the low of 4,531 will be taken off and Nifty could form a new bottom as far as this bearish phase is concerned.

As we enter the earnings season, we are likely to see some positive surprises in the early part, but there will be trouble when metals and capital good companies starting announcing their numbers.

rajivnagpal@mydigitalfc.com