Get ready for a range-bound phase
Most short-term charts are in the buy mode, but some have come close to giving sell signals

Last week was largely an extension of the previous week’s trend. The only difference was that the market breadth got volatile on some days, with slightly negative bias. The market moved within narrow margins to the positive or negative sides. So while it was not bearish, it reflected a mood of caution in the market.

This is understandable as the Nifty, after touching a low of 9,951, retraced almost 50 points of the down move, and is placed midway of the corrective moves. This confusing state is making the market a bit dull. It doesn’t have many short positions in the system and at the same time not much buying is happening, since traders aren’t sure which way the market is moving.

The market moves when combined with market breadth can give a reasonably good idea of the emerging trend. If the Nifty stays in a range-bound mode coupled with a positive market breadth in the mid-cap segment, it would be a sign of consolidation. But, if the index stays range-bound and the market breadth is negative, it would indicate distribution—a phase when informed investors start selling in anticipation of a bearish trend.

The domestic news flows were mixed last week. The rupee, which has been outperforming for quite sometime, came under pressure in line with the moves of peer currencies, as the crude prices began creeping up. But this was within the comfort zone of the equity market, it seems, as there was hardly any negative reaction in the market to rupee depreciation. But if the currency weakens further, it might weigh in on the equity market. The increase in the cost of petroleum products apart, currency volatility increases the cost of hedging for companies and reduce their overall margins.

The good news was that the monsoon is going to be normal this time. But the price reaction to this was muted in individual stocks. Since valuations are high and a similar forecast was made by a private agency a week back, the market didn’t react much to this development.

In international news flow, other than the oil price rise, there was nothing that the market could take note of. But the way market has been shrugging off the rising oil price is also surprising. Probably, marketmen expect crude prices to cool down in a fortnight or so. President Trump also indicated that oil prices are hiked artificially. If the US shale gas production increases, that would act as a counter to the rising oil prices. So investors have to watch shale data for clues to the oil price trend.

Coming to short-term indicators, most short-term charts are in the buy mode, but some have come close to giving sell signals. But given that the market is still having a long-term bullish trend, a weakness in short-term indicators should be taken as a sign to book profit on long positions rather than for taking aggressive short positions.

The moving average convergence/divergence (MACD) on the daily charts is in the buy mode but the average and the trigger lines have shown the first signs of converging, though a sell signal is still far. If the Nifty stays range-bound, as it has done in the last three trading sessions, more weakness might emerge but this important indicator would be far from giving a sell signal. Rather, there is a higher probability of an upward breakout.

The 12-day rate of change (ROC) is still placed in positive territory and is not showing signs of any major negative divergence, which again is a bullish signal. The extreme short-term indicators are in overbought territory as they move in sideways direction, in a resumption of the trend the Nifty had for the whole of last year.

The Nifty is placed just below its resistance level of 10,600. It has to cross this level with a long white candle and stay above for two sessions for momentum to come in bulls’ favour. After this, another resistance level comes in the range of 10,820 and 10,900, where profit-booking could bring stagnation before the index sees any strong directional move.

As for support levels, a move below 10,480 would lead to profit booking pressure from bullish traders who have been holding on to their long positions. The next support comes at 10,400, where some short-term averages are now placed.

Rajiv Nagpal