In range-bound mode

Traders with mid-cap exposure should keep their trading positions light this week and retail buyers may wait for prices to become attractive

A big event that every segment of financial markets across the globe were waiting with bated breath went off peacefully. Contrary to expectations, most asset classes did not see any volatile moves after the US Fed announced a 25 basis points rate hike, the first in 2016. Surprisingly, the hawkish statements that accompanied the policy move were also not taken seriously by the global markets. It is rare that the words of the most powerful central bank chief are ignored by the financial markets, especially currency markets.

When the Federal Reserve said three more rate hikes might come in the next 12 months, that should have been enough to unnerve the global markets. But given that a change of guard is imminent at White House, global markets seemed to be in a mood to see what the new administration might bring to the table. Since president-elect Donald Trump’s choice of sectaries has been a bit unconventional, anything can be expected from the new US administration.

Most likely, global markets would start on a strong directional movement only after a few policy changes are announced by the new president in February-March. Until then the market may remain confused and range-bound, though Dow Jones, which has high weightage of financials, might out-perform in the interim. There would be phases where emerging markets may swing sharply in reaction to statements coming from people who join the new administration.

Historically, defensive large-cap stocks tend to outperform in such phases, as some part of the money that is bound to stay in equity instruments rush to these stocks. So, traders have to keep an eye on the FMCG stocks that show a sudden out-performance, especially if they don’t fall in a declining market. Also, the stability in defensive stocks would mean that the Nifty might see range-bound moves at regular intervals.

Domestic news flows were passive last week. Though some macro numbers indicated a deceleration in the economy, which was on expected lines. Interestingly, despite talks of gold demand going up post-demonetisation, gold imports have hardly gone up. Gold import figures would roughly indicate how much money is going back into cold storage. If gold import figures stay moderate, long term investors would take that as a positive sign.

Most oscillator charts are still not indicating a strong and sustainable directional movement in the market. The moving average convergence/ divergence (MACD) on the daily charts is placed in the buy mode, but the average and trigger lines are converging, turning slightly bearish. In the recent past, this oscillator tended to show weakness, but has still not given a clear sell signal. On the weekly charts, this oscillator is still in the sell mode as it enters negative territory.

The 12-day rate of change (ROC) has once again slipped into negative territory, indicating weakness. The extreme short-term indicators of Nifty are in equilibrium territory as many of them keep slipping from overbought territory after showing mild negative divergence.

The macro-formations on the price charts are not so strong, as the Nifty, after correcting sideways, has once again started slipping gradually. Such formations indicate that no major selling or buying is happening, a situation in which the Nifty could stay range-bound, with weak market breadth in between. So, it would be better for traders with mid-cap exposure to keep their trading positions light and for investors looking to buy mid-cap stocks to wait till prices become attractive in terms of risk-reward.

Coming to short-term support and resistance levels of the Nifty, the first minor support for the index comes at 8,120. If this is broken in a sharp downward move with extreme bad market breadth, the probability of Nifty testing its second support level of 7,916 increases sharply. What matters more than the Nifty’s level is how the first resistance is breached. If it is breached with a strong momentum, it would indicate formation of another panic bottom.

The first extreme short-term resistance zone for the Nifty is 8,230, put up by the short-term moving averages. After this, 8,310 to 8,340 is a zone where a clutch of moving averages and a trend line would give some trouble for the bulls. In case the Nifty crosses this resistance zone with the help of the banking sector, the strongest medium-term resistance would come at 8,490 to 8,510, the zone from where all the trouble started for the bulls.


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