The way the May series ended, scaring the bears away from the Street with more than one per cent increase just hours before the expiry of contracts, shows the bulls are not in a mood to cede ground. However,  whenever such moves happened on the expiry day, it has been seen that the following month would be troublesome in terms of market breadth and volatility.

From the mid-cap stocks behaviour last week, it seems some institutional investors have decided to cut their risk in that space and started selling mid-caps lock, stock and barrel. The interesting bit is that this sell-off was triggered by the resignation of the auditor of a beverages company. Even the more interesting fact was that the company was fairly well-owned by institutional investors, and large brokerage houses had been giving the stock a Buy recommendation. Now the question is, should the research capability of these brokerages, which had been giving the company certificates of competence, be also questioned now. It is worth recalling that whenever the market corrects, skeletons tend to come out and they never come alone.

News flow on the macro front was on expected lines. The fourth quarter GDP numbers were in-line, but remember that the impact of higher oil prices had not yet seeped in during the three months.

News flow from the international market was not good to the extent that after a couple of years of calm, Europe has again become a reason for global market volatility. While there is little probability of Italy or Spain becoming larger issues, still Europe needs to be watched. Also, once again there were renewed fears of a trade war, but this time between Europe and the US. What would significantly dent the market will be any dispute between the US and China, than Europe. Probably more news flow on that would come in after the summit between the US and North Korea.

On oscillator charts, extreme short-term indicators are in the buy mode, but most had not shown the required strength at the start of the buy signal and hence are once again showing weakness. The average and trigger lines on the daily moving average convergence/divergence  (MACD) chart have once again started to converge right after giving a buy signal. If this buy mode gains strength over the next one or two trading sessions, it will be fine, otherwise if a sell signal emerges, that would be a bearish signal and risks breaching the lows formed in the second half of the May series. A similar kind of formation is visible on the weekly MACD charts. While the oscillator is still in the buy mode, it lacks strength.

In such a condition, when oscillators are not giving a clear trending signal, the best thing traders can do is to stay long, but with a trailing stop loss on all long positions, be it stock or index.

The 12-day rate of change (ROC) is placed right below the equilibrium line. This line is normally a resistance area and a cross-over would be a bullish signal. If it fails, that would indicate another phase of decline with some momentum.

The extreme short-term indicators are placed close to the overbought zone and some have started to turn south, indicating a higher probability of pressure on the index. 

Coming to short-term support and resistance levels, the correction that started last Friday gets its first minor support at 10,618. After which the index should not breach 10,575 on a closing basis, as that would take Nifty below the recent low of 10,417 and a break-down would bring momentum to the southward direction.

The first resistance to the Nifty comes at 10,820, after which another stronger resistance would emerge from the trend line drawn from the all-time high formed in January. Any strong upward momentum in the Nifty would come only after this trend line and the recent top of 10,929 are crossed.

rajivnagpal@mydigitalfc.com