No respite from volatility in sight
Nov 20 2016
All the oscillator charts are in sell mode, with no signs of any positive diver- gence
The primary reason for this souring of sentiment is a general assessment that the third quarter top and bottom lines are going to take a hit from the unanticipated cash crunch. Be it auto firms or retail chains, all complain of a slowdown in sales that may stay on until the quarter end.
In this correction, the index is trying to discount the expected drop in quarter-on-quarter numbers. Since the best names in the business are getting impacted there is bound to be more volatility in mid-cap stocks.
What is compounding the selling pressure on mid-caps is a readjustment for the unrealistic and underserved bullishness the street exhibited on the segment from March this year.
Many companies whose fundamentals are extremely fragile had risen sharply in the last couple of months. These stocks are now slipping sharply, making it appear that the heavens are going fall. Retail investors have to dig a bit to find the reasons behind a particular stock's fall. If the decline is because of the expected fall in earnings in the next two quarters, there is no need to panic and sell, as this too shall pass. But if the decline is because of its undue valuation, a better option for investors is to book losses and move out the stock for a better investment opportunity.
Another reason why panic got accentuated in the futures and options segment early last week was the forceful squaring off of positions by large brokerages. Margin calls get triggered when Nifty and the broader market show a declining trend, and traders, for whatever reasons, are unable to transfer additional mark-to-market losses to their brokers.
This time, the square off pressure got over in two days. Not many squaring off positions were visible towards the end of the week. This probably signals that over-speculative positions, or positions of over-leveraged traders, are out of the market. This means that any pull back ahead could be more sustainable, unlike that in last week. But a pull back will depend on whether or not fresh selling emerges in large-cap stocks from institutional investors. So keep an eye on the selling and buying figures of institutional investors.
Global equity markets had not been unkind to President Trump. But moves in currency markets indicate that volatility might revisit equity and debt markets if the dollar keeps strengthening the way it did last week.
All the oscillator charts are in the sell mode. But what is more important at this point is whether the extreme short-term charts have started signalling stage one of positive divergence. No such signals are visible, which means more pain is left and a trend reversal is not on the card.
The moving average convergence/divergence (MACD) is currently placed in the sell mode, and is far from the zone from where it had seen a reversal. The 14-day relative strength index (RSI) has entered oversold territory and has still not given any indication of a trend change. On the extreme short-term chart, this oscillator has reached oversold territory, but this has also not indicated any trend reversal. The other extreme short-term indicators like stochastic and William %R are placed in the sell mode above the oversold zone. This is also not showing signs of any near-term trend reversal.
Even if the charts show nil possibility of a trend reversal, it does not mean that a bounce back is out of the question. Even if that happens, its near-term quality is a critical element, as that would determine the time-frame of correction in the market. The weaker the bounce-back, the longer the pain for Nifty and the harsher the correction in mid-cap stocks.
Coming to short-term support, the Nifty should not crack below 8,000 on a closing basis, as that is a strong support level. If that happens, another strong support would come in the range of 7,750 to 7,700. The first short-term resistance point for the Nifty is 8,250, after which a strong trouble spot comes in the range of 8,375 to 8,400.
Retail investors should remain focussed on quality stocks at this point in time. It would be better to change to systematic investment plans, so that even the declines are utilised, without panic.