Stay with a bullish mindset

Extreme short-term indicators are in overbought territory, as they keep moving in sideways direction. Some of them are also showing negative divergence

After moving in different directions for weeks, the broader market and the Nifty 50 index have converged last week, with both displaying a bullish trend. For the past many weeks, a divergent trend existed in the market, with the market breadth having a bullish undertone when the main index remained range-bound. Last week, the Nifty broke through this trouble zone. The trigger for this upward move was the budget holding no surprises on long-term capital gains, an issue that has been weighing down the market. On the budget day, the Nifty started moving up sharply from the moment it became clear that long-term capital gains tax was largely untouched.

What is probably more bullish about the post-budget market is that neither the Nifty nor the market br­eadth suffered a major dent. Yes, some degree of profit booking was seen in some stocks, but rising banking stocks more than kept up the momentum.

The earnings season continues to show more positive surprises. The results are better than estimated by the market. The final auto numbers for January will give a clear picture whether things are back to normal.

In international developments, the US administration’s moves on H-1B visas created issues in the short-term for the IT sector. Though reports have appeared that Indian IT companies will try to find a way out, the fact is that they will have to live with the new rules. This will put pressure on IT stocks in the short-term, but on the brighter side, this phase of readjustment will help IT companies to emerge stronger and move up the value chain. Strong players in the space may not be affected much, since they would be already paying their staff close to the proposed salary limit of $1,30,000. But companies that have built their business models around labour arbitrage would be facing the music. So, there will be a phase of re-rating even in the large IT space, and that would make some sessions volatile, going forward.

Coming to oscillators, most short-term charts are firmly placed in the buy mode. The moving average convergence/divergence (MACD) on the daily charts is in the buy mode, but is close to the level from where it had witnessed resistance in the recent past. On the weekly charts of this oscillator, clearer buy signals have emerged, as the average and trigger lines have further diverged. The 14-day relative strength index (RSI) is in overbought territory. Soon negative divergence would be visible on this index.

The other extreme short-term indicators are placed in overbought territory, as they keep moving in sideways direction. Some of them are also showing negative divergence. However, negative divergence can last long before it impacts Nifty’s movement. Still traders should have profit protection points on their long positions so that in case of a sharp correction, at least some profit is protected.

Coming to short-term support and resistance levels, 8,580 is the first level of support for the Nifty. The next important support level is 8,470, which the index should not break to retain the uptrend that started in late December. The first resistance for the Nifty comes at 8,860. The index should cross this level in a strong upward move and stay above it for at least two trading sessions for the Nifty to make a serious attempt to break its all-time high level in the next couple of months. This can happen only when both bank and IT sectors move up in tandem and are supported either by metal or pharma sector.

Retail investors are strictly advised to stick with quality stocks, since stupid mistakes are committed the most when there is an all-around bullishness in the market; a time when investors tend to ignore the quality of company balance sheets.

rajivnagpal@mydigitalfc.com

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