Despite favourable macro developments, indices witnessed correction last week. While no sector could be singled out for a major correction, it was rather minor hits across different sectors that pulled down broader market indices. In some phases mid-cap indices showed signs of outperformance. Though it would be too early to say things could improve in the mid-cap space, such intermittent up-moves probably rules out another round of washout in the mid-cap space.
Domestic news flow was positive to the extent that a clash between the central bank and the government was averted at the RBI board meeting. News reports suggest that differences could crop up in the next board meeting in mid-December.
Whatever be the outcome, traders may remember that there are no perfect conditions for trade. Various kinds of risks are present in the market at any point in time. Rather than fretting about risks, traders can just hedge those risks. Also, it is often wise to ignore speculative media reports, which mostly does not come true.
International news flow was positive for the Indian macro, as crude oil prices slipped below the 63-mark and that gave the rupee a definite lift. While the rupee may stabilise around the current levels, it has become once again clear that that the beta of the Indian market with oil prices has further strengthened in the last five months and, going forward, it would be a major factor that impacts the equity and currency markets.
On the flip side, the US equity market slipped sharply last week. Going by the trend, more pressure could come on the US market. A solace to the emerging markets, including India, is that the US market was driven down by a handful of tech stocks that had been trading at lofty valuations for long. A market correction led by a few stocks would have more to do with local dynamics than fundamentals. But the US market being the mother market, even a local issue is good enough to send short-term shiver to the perennially bullish trader.
For the next couple of weeks, the Indian market would be glued to news flow surrounding the state elections and would react in tune with that. At this point, the market is going into the elections with the notion that the BJP will face tough competition in states like Rajasthan and Madhya Pradesh. If the results are contrary, especially in MP, then the market is likely to react positively to the outcome and give a much-required upward trigger.
Coming to oscillator charts, some short-term indicators which had managed to cross their resistance zones have tuned weak and are close to giving sell signals. The moving average convergence/divergence (MACD) on the daily charts is right at the equilibrium line, with the average and trigger lines converging, as they get ready to give a sell signal.
Normally, a sell signal coming from historically important resistance zones have two characteristics; either they reverse fast, which means a correction would largely be in the form of a higher bottom formation, or they start a fresh round of southward movement. So, a correction should get over by mid-week and should not lead to a large black candle formation, if not it would spell trouble for the market.The extreme short-term indicators, like Stochastics, have given sell signals as they move down from overbought territory.
Coming to short-term support and resistance zones, the Nifty couldn’t cross its 200-day moving average (DMA) placed at 10,714 and that still would be the biggest trouble spot for the bulls. But before that a small resistance would come at 10,650, which the index needs to break with a large white candle. If it achieves that the probability of Nifty crossing its 200-DMA in the second attempt would increase.
The Nifty gets support at 10,490, where lies trend line that was giving it resistance but would now lend support. If the index slips below this level, the second support would come in the range of 10,300 to 10,350. Normally bank and IT stocks do not move in tandem, but if they do, the Nifty might move down to hit the second support levels.