Hold tight! Nifty might be heading lower in May series; avoid small and midcaps

Rohit Srivastava, Fund Manager – PMS, Sharekhan by BNP Paribas said two candlestick reversal patterns at an important retracement level mean that 10,915 is now an important hurdle and the Nifty is unlikely to go above it. “In other words, we are headed lower in May series,” he told Moneycontrol’s Kshitij Anand.

A) After going up for seven weeks, the Nifty stalled exactly at its 78.6% retracement level and sold-off. In doing so, it formed a Shooting Star Doji pattern on Tuesday. It also happened to coincide with the Karnataka election verdict as prices went to the highest level and sold off intraday.

At the end of the week, it formed an Engulfing Bear pattern. This pattern is formed when the index opens above last week’s close but closes below last week’s opening level.

Two candlestick reversal patterns at an important retracement level mean that 10,915 is now an important hurdle and we are unlikely to go above it. In other words, we are headed lower in May series.

A) A sell signal from momentum indicators like moving average convergence divergence (MACD) occurs after weeks of rallying on thin volumes and negative breadth. This means that the trend reversal is not a correction or consolidation but a decline.

If 10,915 marks a lower top than the January high, it raises the odds of a lower bottom below its 9,950 low in coming weeks. A lower top-bottom formation would then confirm the onset of a bear market

A) If people are still long on stocks that are making 52-week lows, they need to assess why they bought them in the first place. If the trades have gone bad, then an exit is usually the first decision.

The risky strategy is to try catching a falling knife. To buy when stocks are falling like nine pins, without waiting for a clear sign of bottom from the market or Nifty itself, is not the right thing to do. So, managing risk by selling is what’s needed now.

A) Midcap and smallcap stocks are reversing a trend of outperformance that was in existence since 2013. Starting January, midcaps and smallcap stocks are underperforming the Nifty. Such a trend once started can go on for a period of time say one-to-two years and therefore it is too early to get back into them. This is not the time to delve into such stocks.

It is rare where one stock or sector holds out in such a period and only if you are sure of such an event should you take exposure. Do keep in mind that it could take time to play out when the rest of the market is under pressure. The general idea, however, should be to avoid this segment for now.

A) Crude oil prices have been making higher tops and bottoms and there is no sign of a trend reversal yet. $68-69 per barrel is likely to be a strong support zone and we are most likely headed towards $75 per barrel or higher in the coming days.

A) The Anil Dhirubhai Ambani Group (ADAG) group has been a in the news of late but for all the wrong reasons. Past analysis shows that when midcaps are in turmoil, these stocks lead the way down and therefore are great short-selling candidates.

Reliance Capital, Reliance Infrastructure and Reliance Power are looking good for another 10 percent fall from here on, with a risk of a 2-3 percent upside in the coming month.