Waiting for US Fed to move

Any sustainable directional move would be decided only after the Fed meeting. Until then traders will have to bear with uncertainty

Waiting for US Fed to move
Always, expect the unexpected in financial markets. Given that banks are flushed with funds, it was expected that the Reserve Bank of India would cut the repo rate by at least 25 basis points on Wednesday. Some expected the RBI to be more aggressive and reduce the policy rates by 50 basis points. But the RBI took everyone by surprise by keeping a status quo on policy rates. More than RBI’s explanation for not doing so, what is significant is that it pegged down the GDP growth rate for this fiscal year at 7.1 per cent from 7.6 per cent. The central bank’s GDP forecast clearly indicates that it does not see much impact of the demonetisation on economic growth.

Whether the RBI estimates are optimistic in the light of other estimates that see a decline of between 1 and 2 per cent would be clear only later. Given that RBI is an institution that has all the required data points with it and is best placed to make a forecast, it would be better to go with its estimates at this point. Also, the way the rupee gained on Thursday indicates that the currency market is comfortable with the RBI projections. This is more relevant than the panic attack suffered by the equity market on Wednesday.

Possibly, the RBI is worried about the US Federal Reserve’s likely rate moves. Global markets expect the Fed to announce a rate hike this Friday. In view of this, the RBI perhaps does not want to risk lowering the interest rates, which could trigger short-term outflows from the debt market. Yet another assumption of the equity market is that the RBI is worried about the rising trend of crude oil prices. Any sustained rise in crude prices could push up inflation, which is otherwise projected to come down. So, RBI has decided to maintain the status quo for now. Crude oil price charts are important for equity traders as well.

An international event raising concern was the referendum in Italy. But the global markets shrugged off the negative vote in Italy that led to the resignation of PM Matteo Renzi. May be the markets consider Italy to be too small an economy to have a major impact on the global markets. But the trend of Europeans voting against government proposals could pressure the euro, going forward. More than anything, it will keep a sword hanging over companies whose revenue comes from the euro zone and raise their cost of hedging.

Over the next few sessions, the market would be focussed on the US Federal open market committee (FOMC) meeting. This means hedging cost would be high this week, and in uncertain times, it is rare to see broader market indices going up sharply. The market has been inching up, taking the Nifty close to the upper end of the range in which it is expected to move, as the market awaits Fed action. What could give a sense of relief to the bulls is that before such an event risk, even the bears are not comfortable keeping their short positions open. Note that even the market breadth improved on Thursday. This should give some comfort to traders with long positional trades, especially in mid-cap stocks.

Many short-term indicators are in the buy mode, but they have not been able to cross their resistance zones. Some are showing an upmove momentum. The moving average convergence/divergence (MACD) on the daily charts is in the buy mode, as it inches up in negative territory. Its movement into positive territory will confirm a bullish direction. The 12-day rate of change (ROC) is in positive territory, but it is giving the first hints of exhaustion, as the pace of upmove has slowed a bit. The other extreme short-term indicators remain in the buy mode, as a lot of them ticks up in equilibrium territory.

The 14-day relative strength index (RSI) is in equilibrium territory, inching upward. An advance break out signal has appeared on the charts, raising the probability of Nifty attempting to cross its short-term resistance-giving trend line. This would give resistance in the range of 8,390 to 8,420 points. The Nifty might witness tough resistance at this zone and only when it crosses this zone and stays above for next two trading sessions can it move towards breaking the 8,598 range, which at this point is an extremely strong short-term trading resistance.

As for the support range, the zone between 8,165 and 8,112 points is the first line of defence for the bulls. Some short-term moving averages and minor trend lines would lend support to this zone. If the Nifty moves below this zone with bad market breadth, then the 7,920 level might be retested. Any sustainable directional move would be decided only after the Fed meeting. Until then traders will have to bear with uncertainty.

rajivnagpal@mydigitalfc.com

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