Stay bullish with Stop loss
Keep an eye on earnings of mid-cap NBFC and micro-finance companies

Though the Nifty corrected for two days last week, traders were little bothered about the index’s slide. For two reasons: first, the correction was caused by a large cap stock with high index weight, ITC. Such one stock-led corrections don’t hold for long. Second, mid-caps did well for a large part of the week, though some counters felt a degree of pressure. But no panic selling or correction was visible in midcaps.

Moreover, the earnings season is shaping up more or less on the expected lines. Some index heavyweights delivered better than anticipated results, which led to a recovery on Friday. Traders will now have to see how the earnings of some mid-cap stocks from the NBFC and micro-finance space fare. These stocks have been leading the rally for the last two months. Any disappointment in the results of these stocks will exert pressure on these sectors and

other related sectors from unwinding of positions. Institutional investors have taken trading exposure in

these sectors and their unwinding could prove a market spoiler in the short-term.

Coming to news flows, the merger of HPCL with ONGC would be a reality now. While this might be of interest to shareholders of these two state-run companies, it also indicates that the government would be keen to go ahead with its merger agenda in the banking sector. That would mean the Nifty could see volatility, depending on the merger candidates.

News flows from the international market were slightly negative. The US flip-flop on healthcare reforms gave some jitters to the markets, as it gave the impression that President Trump’s tax reform plan would also see trouble. While it might be bad news for the US, a flopped tax reform plan wouldn’t be that bad for emerging markets, which fear that large US corporations would walk away from expansion plans in emerging markets if the tax arbitrage these countries offer now is gone.

The Nifty is now showing a text book-like move—a phase of upward movement followed by a short phase of consolidation and then another phase of upward movement. As the index plays by the book, even the short-term oscillators are showing a similar trend, except that the negative divergence on them is growing. In such circumstances, it would be better for traders to look at longer-term charts. If those charts also show negative divergence and it coincides with the moves in Nifty, then traders can think of taking short positions. Either stay long or stay out.

The moving average convergence/divergence (MACD) on the daily charts is placed in the buy mode though the average and the trigger lines are converging and are pretty close to giving a sell signal. On the weekly charts, too, a similar trend is visible, as they are close to giving a sell signal.

The 14-day relative strength index (RSI) is placed in equilibrium territory but close to the overbought territory. Though this is showing negative divergence, the impact of it has to be confirmed by the Nifty’s moves, which gave no confirmations so far.

The 12-day rate of change (ROC) is probably an indicator giving more bearish indication than the rest, as its upward momentum has slowed down. But this is not a signal to take aggressive short positions, but perhaps a sign to take some profit off the table, since this oscillator has not broken its short-term support level in the recent past.

The other extreme short-term indicators are in the buy mode as they hover around overbought territory. Here too, negative divergence is appearing once again, which means that the initial part of this week might see some correction.

Coming to support and resistance levels for the Nifty this week, Friday’s up move in the Nifty was largely led by one stock. Otherwise the Nifty would have ended the day in the red. So, the first support for the index in a corrective move—which could happen in the first half of this week—comes at 9,840 points. After which another strong short-term support come at 9,719, which the Nifty should not break for the current phase of upward movement to stay intact.

The first resistance for the Nifty comes at 9,970, after which 10,070 would be the next level where profit booking could be seen. But more than the absolute level, one has to see what is leading the correction. Only if the index closes two days with strong losses should a  trader think of taking short positions. If the correction is happening with broad, range-bound movements, traders should wait for the upward movement to resume before taking long positions.