In a range-bound mode

IT stocks, should continue to perform well because of the weak rupee

In a range-bound mode
Months of complacency prevailing on Street, finally got a rude shock last week with Nifty sharply slipping southward over five trading sessions. True, minor periodic corrections were happening earlier, with Nifty losing marginally, while still staying close to the upper end of the range in which it had been moving for the past couple of months, during which a strange sentiment was building on the Street. It was being taken for granted that Nifty would not slide below 6,100, though nobody was willing to give half a chance to the broader market to recover. So while nobody went short on Nifty, most went long on individual stocks.

Now, at least the first assumption prevailing on Street has been questioned with Nifty slipping below the 6,100 mark. As for the second assumption, it should take some time to figure out if that is correct at all.

There is good reason to assume that the Indian equities market will remain range bound, while interest rate stocks might suffer, as the slowdown continues. IT stocks, however, should continue to perform well because of the weak rupee. Net, Nifty should remain range bound.

It needs bearing that Nifty will remain range bound close to the upper end of 6,100- 6,400, provided there are no major negative developments in the international or domestic markets. Should that happen, Nifty could shift its range to 5,800-6,000, which appears to become a reality.

The current wave of correction came because of two reasons: First, there was an unexpected rise in policy rates, so the anticipated short-covering bounce in banking stocks did not materialise. Secondly, the US Federal Reserve announced a further cut in it bonds buying programme by another $10 billion.

Adding fuel to the fire, the expiry of the January series contract last week pulled down the index, leading to a situation where the long rollover was reduced and unwinding pressure hit the Street in a large number of banking stocks.

The factors, which led to fear revisiting the Street, are still present and will continue to keep the market under pressure for some more time to come. The only hope for Indian market is that the country is better prepared for the current readjustments in global flows than it was last May.

February does not promise any major developments on the domestic front. The fact that the government has lowered its GDP forecast is only an admission of what the Street has believed in and largely discounted for long.

Yet, since the global markets have closed weak, the market is likely to witness a few more corrective moves when it opens for trade.

Since the load of long positions has come down dramatically in the past few days, any build-up of fresh short positions over next couple of sessions would eventually help in building a base for volatility over the next couple of weeks.

A majority of the oscillators charts are clearly in the sell mode, as they slip southward in the equilibrium territory or have entered into negative territory.

The moving average convergence divergence (MACD) on daily charts is in the sell mode, as it slips southward into positive territory. This oscillator has entered the negative territory after a long gap, which is a bearish signal for a positional trader. The weekly charts of this oscillator are also sending out a sell signal. The 14-day relative strength index (RSI) is also slipping southward in the equilibrium territory.

The other extreme short term indicators that were in the sell mode for some time have entered the oversold territory, but have still not given any sign of change in the current trend. Nifty is placed close to a strong support level of 6,040. If it slips below this level, as is highly probable, its next support should come at 5,950, after which, there is no real support till the 5,800 mark.

In the past, Nifty has taken support around its 200-days moving average, but that has come within a couple of days of Nifty coming close to this average. So, if a recovery does not get kicked in during the next couple of trading sessions, the probability of further correction would increase.

Coming to resistance levels, any recovery in Nifty would depend on the way banking stocks behave, as they attempt to push up, Nifty would face resistance at 6,150, after which, another minor resistance would come at 6,220. Should Nifty cross that mark smartly with a good market breadth, it would possibly move even higher.

Yet, it pace of rise and the stocks behind such a push need to be watched. Retail traders should stay away from taking any large long position, if the index is pushed up by a handful of stocks.

rajivnagpal@mydigitalfc.com

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