Volatile moves the new normal

A bearish hammer has got formed on the weekly candle stick charts, which spells trouble in the next few sessions

It was another week of ups and downs on the street. But the Nifty came out largely unscathed from them, by limiting the weekly loss to 27.50 points. Intraday movements, however, showed that the strong bearish sentiment that prevailed in prior week had cooled down somewhat. Noticeably, strength has returned to the mid-cap segment to some degree.

While most mid-cap stocks still rule far below their early November prices, some have retraced at least 50 per cent of their losses. This shows there was no blanket battering of mid-cap stocks, which was the biggest fear when the current corrective move started. It also indicates that some mid-cap stocks are still able to attract buying at lower levels. That leaves scope for retail investors to be optimistic about their direct and indirect exposure to the mid-cap segment.

But traders have to keep in mind that buying in several mid-cap stocks is financed by brokerage houses. Every large brokerage house has a list of stocks that are either accepted as margin for trading in the futures & options segment or being financed in some fashion to facilitate their purchase.

In bullish times, such stocks register faster gains, but in times of sharp correction caused by unforeseen events—like the ones witnessed last month— these very stocks which were given as margins see hectic unwinding because of forced selling by brokerages as part of risk management. So, traders who have long positions in mid-cap stock would do well to hedge their positions ahead of events that would sent the indices deep south.

At the moment, what is important to the Indian market is the rise of crude oil. Oil prices spiked on Wednesday on the back of news that Opec countries had agreed to an output cut, the first in eight years. In the recent past, there had been some spikes in crude prices, but those were random events which settled in due course. But if the price trend now changes, as is likely, to an upward cycle, it is a matter of concern for the economy and oil companies. Many companies had reported higher margins from the decline in prices. Such firms would come under pressure if the trend changes. Equity traders need to watch developments in the oil market.

For the next few sessions, the whole market would be focused on what rate actions the Reserve Bank of India and the US Federal Reserve would take. More than the rate increase or status quo, the market sentiment would be guided by the RBI’s data points on demonetisation. What timeline would the RBI give for the normalisation of currency supply would be a critical factor to watch, as that would give the market some idea on growth revival in consumer segments.

As for the US Fed, it is more or less certain that a rate increase is on the way. The guidance on the trajectory of interest rate hikes given after the Fed meet is also important. If the guidance is not aggressive, emerging and global currency markets may not witness a sharp decline. But if it is hawkish in nature, there could be more adjustments in currency markets as well as volatility in equity markets.

On oscillator charts, the extreme short-term indicators are still in the buy mode, but slightly longer-term ones remain in the sell mode. Even the short-term ones in the buy mode are not showing the kind of strength normally seen at trend reversals. The moving average convergence/ divergence (MACD) on weekly charts is in the buy mode, as it inches up in negative territory. But the ratio of difference between the average and trigger lines is not wide, indicating a higher probability of even this buy signals disappearing soon.

The 12-day rate of change (ROC), which had been moving in positive territory, has again turned southward and it is now placed just above the equilibrium line; its movement into negative territory will give a bearish indication. The extreme short-term indicators, like stochastic, are placed right below the overbought territory and have turned southward, indicating a bearish tendency. A bearish hammer has got formed on the weekly candle stick charts, that could give trouble to the bulls in the next few sessions.

Coming to short-term support and resistance ranges, the first strong support for the Nifty comes at 7,929 points, its closing range on November 21. The next support range comes at 7,850. If one goes by momentum charts, there is a high probability that the Nifty would slip below its first support level for a short while before witnessing a pull back. The strength of this pull back is critical for positional traders. If the moves are similar to last week’s—like marginally up for three days and then surrendering all gains in the next session—the Nifty could be on its way to form a lower top and bottom formation.

The first resistance for the Nifty ones comes at 8,250, after which 8,400 is the red flag for the bulls on the street.

rajivnagpal@mydigitalfc.com

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