Higher volatility on cards

It is not every week that the equity market has to deal with two stunning events—one national and the other international—and still wrap up the week with a loss of just 137 points. In the past, too, the Nifty had shed more than 1.5 per cent weight, but the difference this time was that the volatility was extremely high, at the index and market breadth levels. Volatility takes a toll on the trader by stealing his trading capital and the confidence to trade.

So, unless you are a professional trader who earns his living through equity trading, it is better for you to stay away from short-term trading in such volatile times. Also, the kind of moves seen last week once again brings to the fore two things. First, if the market is being led upward by high global liquidity, all surprises and shocks are absorbed without much pain. Second, if the charts are showing negative divergence, surely a correction would come, even if it takes time. So, any trader who checks the charts before taking a buying decision should never disrespect negative divergence. Negative divergence had been appearing on the momentum charts for the last six weeks, still the Nifty was inching upward. But the divergence has shown its impact in the last two weeks.

On Tuesday, not just the market but the whole nation was taken by surprise when the government announced the demonetisation of Rs 500 and Rs 1,000 notes. On Wednesday, the market opened to absorb the shock of this, along with the US election trend, where Donald Trump was leading. The market reacted in panic to both events. Though panic settled towards the end of the session, selling pressure was still there. But panic returned on Friday, as there was no apparent reason for the market’s fall that day. Probably, unwinding of positions was going on because of the extended weekend, as traders were wary of any sudden development over the next three days. Traders having positions in mid-cap stock futures faced more problem, as mid-cap and small-cap stocks tend to take a hit of more than 10 per cent at the drop of a hat. Going forward, mid-cap stocks should continue to see volatile moves. So, traders should think twice before taking long positions in this segment.

Oscillator charts, both short-term and positional ones, are in the sell mode. The moving average convergence/divergence (MACD) on both daily and weekly charts is in the sell mode. The only difference being that on daily charts, MACD has slipped further into negative territory whereas in weekly charts it is still in positive territory, indicating the probability of selling pressure emerging on broader market indices.

The 12-day rate of change (ROC) is placed in negative territory, as it keeps moving south. Even on the weekly charts, this oscillator has moved into the negative zone. Since this is the first oscillator to show signals of a change in trend, traders need to keep a watch on this oscillator before taking any large positional, bullish bet. The 14-day relative strength index (RSI) is in the sell mode as it moves south in equilibrium territory; it has reached close to the oversold zone.

The biggest question facing traders is whether or not the low of 8,002 formed last Wednesday would hold in the short-term. This level had all the ingredients of a panic bottom. But a confirmation of this would come only when the Nifty comes close to it and then recover. It had been seen that a sustainable bottom is always retested, but is not violated.

Coming to short-term support and resistance ranges, the first key support level for the Nifty comes at 8,160, after which 8,000 is the mark to watch. The zone between 8,000 and 8,050 supports the index with some critical moving averages and downward sides of the channels got formed in the last few months.

As for resistance, the Nifty will find it tough to cross the gap formed between 8,470 and 8,510. After which another resistance for the index comes very close to 8,580, from its recent high and the downward sloping line. Traders need to keep an eye on banking stocks, as they have the potential to trigger any strong and sustainable directional move after a phase of volatility.

rajivnagpal@mydigitalfc.com

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