Another round of consolidation

Last week was largely bullish, with good market breadth and index movements. Wednesday saw a mid-afternoon scare when the Nifty fell sharply and mid-cap stocks lost all their gains to crash into losses. Such moves indicate the market is slightly heavy on the top. While the index recovered later in the day, the market breadth did not. On Thursday, too, a large number of mid-cap stocks remained under pressure; though selling was not high, there wasn’t any hurry to buy either. As such, in mid-cap stocks, a halt in buying itself leads to correction.

The results of some auto companies indicated the ground situation post-demonetisation when they posted numbers above street expectations. This proves that the Street’s fears about the quality of turnaround in the economy were unfounded. Obviously, the winners are the optimists who believed that the effect of monetisation on the economy would be minimal and short-lived. To some extent, that also explains the rise in the broader market from January.

Probably, this earnings season would end all the fears and talks about demonetisation and the market focus would again shift to operationally efficient companies and their valuations. This would bring back institutional buying in full flow into stocks that have been under pressure since demonetisation.

In the international market, a few developments had the potential to shake the markets but it appears that the developed markets are in no mood to easily believe politicians. The reaction to President Trump’s proposal to cut taxes was rather surprising. Maybe, markets expect Trump’s tax reform proposal to meet the same fate as the healthcare Act, which was rejected by the Congress. Over the next few weeks, news flows on this count will bring in volatility to global markets, but emerging market inflows would be intact and hence possibly emerging markets may outperform. The only risk to this outperformance would be any sudden decline in emerging market currencies. So near-term traders need to look for any reversal in currency markets across the emerging markets space.

Short-term charts have come into the buy mode once again. The moving average convergence/ divergence (MACD) on daily charts has come into the buy mode, but the difference between the trigger line and the average line is not significant enough to indicate the start of a new uptrend. On the weekly charts, both the lines, which were about to come into the sell mode, have once again diverged. This divergence in short-term and medium-term time-frame charts indicates that if the corrective phase in the Nifty takes shape as range bound moves, the strong break-out seen in the weekly charts may get strengthened.

The 14-day Relative Strength Index (RSI) has once again moved up, but the negative divergence remains on this. The 12-day rate of change (ROC) is also showing a pretty much similar indication as it is close to the equilibrium territory. The other extreme short-term indicators are placed in equilibrium territory, just below the overbought territory and most of them are once again showing a marginal negative divergence.

Coming to short-term support and resistance levels, the Nifty fell marginally on Friday, but had it not been for banking stocks, the decline would have been sharper. So the first support for the index comes at 9,290 points, close to the level the Nifty closed on Friday. If the index slips below this range, the next support comes at 9,210 after which a stronger support comes at 9,080. If the support levels are reached in sudden, sharp declines, then the pain could prolong. A gradual decline, as on Friday, would not do much damage.

The Nifty has crossed the resistance range of 9,270 and closed above it. So, instead of at a particular point, the index will now face selling pressure in a resistance zone between 9,480 and 9,540. If the Nifty crosses this zone, a short squeeze would take it further up in a sharp spike.

rajivnagpal@mydigitalfc.com