The year 2012 seems to have brought in some optimism to the Street. Though there has not been any change in the fundamental situation in terms of macroeconomic condition, the market breadth is indeed giving some positive vibes with a number of mid-cap stocks seeing a strong upward movement and outperforming the broader market.

Though the past two weeks could not bring the market out of the woods, it has surely helped remove the feeling that a new low is going to be formed sooner than later. While IIP numbers, which came out last week, were seen as one of the reasons that triggered short covering, specially on the banking counter, it would be too early to assume that things have changed for the better and the market is out of the woods. The third quarter results from technology major Infosys were in line with market estimates, but its guidance for the fourth quarter was as usual muted, and this led to a selloff on the IT counter. This is why the index was not able to move higher past week.

But the fact that Nifty was able to keep its head above water despite a sharp fall in a heavyweight is good enough signal for the market in the given circumstances. Over the next two weeks, results of other large-cap companies are going to be out, and the numbers from the banking sector are going to have the maximum impact. If the numbers from the banking majors are better than what the Street has been expecting, then we are likely to see another round of short covering on the banking counter and the earnings season will pass without any major cut.

Over the next couple of months, the Street is going to keep a watch on the Union budget and the elections in five major states. Both these events have the potential of bringing in a positive change on the policy making front, and it could lead to a strong directional move in the indices.

As far as global markets are concerned, the downgrade of France and eight other European countries was on expected lines and this was being talked about on the Street for a long time. But as the announcement came after market hours, it has the potential of causing a minor setback to the Indian market in the initial part of the week. After weeks of improvement, the macro numbers for the US economy showed there are a few minor hurdles that the nation needs to cross before the recovery gains pace.

Coming to technical charts, after a long time Nifty has been able to come closer to its downward sloping trend, which has offered resistance to the index in many of its intermediate upward movements. This time Nifty has been able to cross this level on an intra-day basis, but not on the closing chart. The index needs to cross this trend line and stay above it for at least three to four sessions for the upward movement to gain more strength. The short-term indicators are now in buy mode, but most of them are placed very close to the levels from where they have turned southward a number of times over the past one year.

If one goes by macro patterns, there is a high probability that we are close to the end of the rally that started from the low formed in the last week of December. The moving average convergence divergence (MACD) on the daily chart is now placed in buy mode, just below the equilibrium territory. In case this indicator is able to move into the positive territory, it would be a strong bullish signal and would help Nifty touch as high as 5,200 over the next few weeks. On weekly MACD charts, it is still in sell mode, but the average and trigger lines are once again converging with each other as it makes an attempt to give a buy signal. The buy signal on weekly charts would coincide with the movement of the daily MACD charts into the positive territory and also Nifty crossing some of its medium-term moving averages. The 14-day relative strength index (RSI) is placed in buy mode as they moved upward in the equilibrium territory. Even on the weekly RSI chart, the trend is turning positive as it has turned upward from just above the oversold territory.

The first support for Nifty in any southward movement would come at 4,767 after which another support would come at 4,700 level. Nifty should not breach these two levels if the ongoing upward movement has to gain further strength after a sharp correction. As far as resistance levels are concerned, the first resistance would come at 4,950 after which another strong resistance exists at 5,130. Once again the Nifty trend would be determined by what happens to banking stocks. It would be worthwhile to keep a watch on banking stocks for signals of a strong directional move.

rajivnagpal@mydigitalfc.com