Once again stock markets witnessed a strong volatile movement this past week, and this time the domestic market under-performed international markets in the bounce that was witnessed in the hope of a settlement of the euro zone crises. But it appears as more and more investors begin to realise that the headwinds being faced by India are getting stronger, they are selling some of their holdings in specific sectors, especially those which are likely to remain under pressure due to the tough macro-economic conditions. The selling seen on the banking counter was an indication that this might continue for some more time. The capital goods sector, which has strong weightage on the indices, also came under selling pressure.

As for news flow from the domestic market, food inflation came down a bit as expected due to the base affect, but the statement that came out from the Reserve Bank of India does not give any hope of a rate cut anytime soon. The macro-economic numbers that came in were bad and the fact that the government lowered its own forecast for the year is something that was expected by the Street. The troubling news for the market is that the selling that has emerged on the some of the large-cap counters can bring down Nifty sharply. Given the fact that a huge volume of algorithmic trade takes place on Nifty, it may lead to further weakness in the market as and when programmed trades get triggered. Also, in many cases investors end up selling their holdings in cash market in order to pay off for trading losses. This may create further pressure on mid-cap stocks.

As far as global markets are concerned, the fact that European politicians were able to chalk out a plan to sort out the financial mess was a big positive for the market in the short term. But the muted way the equity market responded to this shows that a large part of these measures were already built into the prices. Now the market will start reacting to the fundamental economic news flow, which appears mixed as some of the large US companies have sounded warnings on profit growth, though the job numbers showed some improvement.

Coming to technical charts, the short-term indicators are hinting at weakness and most of them are in buy mode. But the big picture on these charts shows that when a sell signal emerges, it would indicate more pain not only in terms of value, but also in terms of time correction, as it could be longer. Any short-covering bounce is going to be small and complete in just one or two sessions. If one looks at the short-covering bounces over the past one year, they have lasted at least a couple of weeks. But the last short-covering bounce the market saw was extremely weak and a little bit of selling in the cash market triggered a sharp fall once again.

The moving average convergence divergence (MACD) on daily charts is now placed in buy mode, but the average and trigger lines are once again converging with each other to give a sell signal. This time the sell signal would emerge from just below the equilibrium line, which is even more bearish. Whenever this happened in the past, the market has seen a strong bearish movement in the medium term. The MACD on weekly charts has turned weak once again. The fact that both short- and long-term indicators are showing a similar trend points to the fact that while a short-covering bounce is due, strong selling awaits the market at higher levels.

The 14-day relative strength index (RSI) is now in sell mode, as it has once again turned southward in the equilibrium territory. Even on weekly charts, this indicator is showing continuation of the ongoing bearish trend. Other short-term indicators of Nifty have signalled oversold condition, but they have not given any indicated any change in the ongoing trend. Nifty had been moving in a broad downward sloping channel, but now a sub-downward sloping channel has formed within this broad channel. Nifty is forming this channel once again after a failed attempt to move above the 5,000 mark. Now, this channel will form a support and resistance for the index in the short term.

Coming to support and resistance levels for Nifty, the first support would come at 4,800 level, after which another support exists at 4,730. In case Nifty breaks this on a closing basis, the market is likely to slip further and form a new bottom for the ongoing bear phase. As far as resistance levels are concerned, in any upward move the first resistance would come at 4,950 level, where some of the short-term averages have come together. In case it is able to cross this level, Nifty is going face fresh resistance and selling pressure at 5,080 level. Beyond this, there would be a short squeeze and Nifty could see a sharp upward movement. If there is a range-bound movement in Nifty, that will give some hope to the bulls to stay in the market.

rajivnagpal@mydigitalfc.com