Global winds to decide direction

In all the recent turmoil in markets across major parts of the globe, there was one last market standing: the US equity market. But last week showed it was impossible for this market to stand tall when the other major global markets were falling. On Wednesday, the US market finally gave in. What should be worrying emerging markets is that US bond yield, which had been largely stable for sometime, has once again become the centre point. If treasury yields harden further, and inch towards 3.5 per cent, then the risk of more money flowing back to the home market is real.

This would mean another round of trouble for currency and yields of emerging markets, which had been showing signs of stabilisation in the last few weeks. It is practically impossible for emerging markets to keep rising when the US market is correcting. It has never been seen in the last 25 years. So, this is phase when traders have to be extremely cautious of overnight movements. Their hedging costs would also go up.

The domestic news flow was positive for the financial space. The State Bank’s decision to help out non-banking finance companies by buying their good quality assets was a confidence building measure for the market and the NBFC sector. It’s a win-win situation for the bank and NBFCs. The bank will have a retail loan portfolio and NBFCs will have badly needed liquidity.

Also, a few deals struck in the commercial paper space had not shown any increase or panic on the yield front. The yield on government paper was also stable. Probably, the domestic situation is now much better than what it was three weeks back and that is a reason on Wednesday when all the Asian markets had slipped sharply, the Indian market outperformed. Even on Thursday, after opening down with a strong gap, the Nifty could recover almost 50 per cent of the losses intraday, though it fell later. Such outperformance was witnessed after a long time and it indicates that if there is no major trouble in the global market, then the Indian indices are likely to see an upward movement.

The only other current risk is oil price. If crude continues to move up, then all bets are off the table.

Another factor to be taken into account is the earnings season. As the macro factors take the front seat, there is a possibility that micro factors like earnings may not be fully appreciated, especially if they are on the positive side. But, if the results are below expectations, then the stocks will get more than their deserved share of beating.

Coming to oscillators, several charts are in the sell mode, but are on the way to giving buy signals. The average and trigger lines on the moving average convergence/divergence (MACD) have started to converge, as the chart makes the first attempt to move up from deep negative territory. On the weekly charts, though this oscillator is still in the sell mode, but the difference between the average and the trigger lines has reached a level from where the two lines tend to start converging.

The 12-day rate of change (ROC) is placed in negative territory and has started to move up, though it has not shown any positive divergence. The lack of positive divergence is probably an indication that while the index may gain more weight, it may not be the end of correction.

Some of the extreme short-term indicators are making the first attempts to move out of oversold territory and a few have shown positive divergence, which needs further confirmation in terms of indicators like Stochastic moving up sharply into overbought territory.

Coming to short-term support and resistance levels, while Friday saw the Nifty getting back to the level it closed on Wednesday before the global storm hit the Indian shores, the index needs to open with a gap up and close Monday’s trading session close to the high of the day for a confirmation of continued up-move.

The first resistance to the index, on a closing basis, comes at 10,570, after which the toughest and the difficult to cross area would be 10,750 to 10,800. Reasons for this are that fresh shorts might get created at that level—as there is a tendency to short market in a pull back when the index comes to a strong resistance zone—and also selling pressure might emerge from traders who have been holding on to their long positions in this bearish phase, so that they can at least close the trade at breakeven levels.

The low of 10,138 formed on Thursday should now hold good as a support range for some time and it may not be broken easily. If it were to break below, the momentum would come strongly in the bears’ favour, and then the Nifty would be staring at a range well below the five-digit mark.

Rajiv Nagpal