Market breadth is a concern

A noticeable bearish tilt is that after a gap of six months, the Nifty has come below its 50-day moving average in a span of seven sessions

In the last six months, there had been very few instances where both broader market indices and market breadth underperformed benchmark indices. Even on days the Nifty had slipped sharply, the market breadth used to be good and the broader market indices recovered much faster than the Nifty 50 index. But last week, the market breadth suffered far more than the benchmark index. That is probably the reason traders felt more pain last week than in the corrective moves of the last six months. It is important to look at the reasons for this change in trend, because any decline in mid-cap stocks impacts the retail investors most. The earnings season is starting this week, and the price movements of mid-cap stocks show many of them have gained multifold in the last six months. But will their earnings match the stock price performance?

It is obvious that many high-riding mid-cap companies would fail to deliver solid numbers to justify their stock prices. Hence, it would be wise for traders to either book profit in their mid-cap positions or keep a strict stop loss on existing positions so that their profit is protected and not stolen away by a sudden decline.

Domestic news flow came with a positive surprise last week, as the Reserve Bank of India (RBI) cut the repo rate by 25 basis points. But the excitement over the rate cut was short-lived as rate-sensitive stocks couldn’t hold on to their gains even on an intraday basis. Such subdued reaction is an indication that the market is getting heavy on the top and requires more positive developments to push it up in a sustained manner. What else would sustain the market other than earnings!

International news flow carried nothing negative on the macroeconomic front from any developed country. But the first indication of impending currency market volatility came from reports that Britain might be preparing for a hard Brexit by the fiscal year-end, which led to the pound crashing against the US dollar. It is after long that a political statement has rattled the currency markets. There is historical evidence that when such trend emerges, volatility would rise in emerging market currencies and equity markets. So traders need to be prepared for volatile movements, which some hedge funds focussed on currency moves might bring about, over the next couple of weeks.

On oscillators, most short-term indicators are in the sell mode. Some have reached close to their short-term support ranges, where they had taken support to give buy signals in the past. The average and trigger lines on the daily moving average convergence/ divergence (MACD) charts is in the sell mode and is now placed on the equilibrium line. Its movement into negative territory will give a bearish confirmation signal.

The 14-day relative strength index (RSI) is in the sell mode as it continues to slip south in equilibrium territory. Other extreme short-term indicators are also in the sell mode, though some have entered into oversold territory, but not many have given any indication of a change in trend.

Macro formations are turning bearish, though not perfect, a kind of head and shoulder formation is taking shape. The Nifty is now placed at the neckline of this pattern and any move below the neckline would mean the index will correct by another 3 to 4 per cent. Another noticeable bearish tilt is that after a gap of six months, the Nifty has come below its 50-day moving average in a span of seven trading sessions. In earlier corrective moves, Nifty just came closer and stayed neat this average for a day and then moved up. Though it has still to close below the filter level before it can be considered as a break down, it is a signal to traders that they should also focus of saving their existing profits rather than earning more from volatility.

Coming to short-term support and resistance levels, as mentioned, the Nifty is sitting close to its important support ranges. If the index slips below its Friday’s closing level of 8,697, the next support would come at 8,555, the low which was formed the week before last. If the index breaks the second support level and a downward sloping channel gets formed, it would be tough to break that.

The zone of 8,830 to 8,850 is a significant short-term resistance range for the Nifty, which it needs to cross with strong market breath and stay above for two sessions for the bulls to come back to the market meaningfully.

rajivnagpal@mydigitalfc.com

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