After almost a year-and-a-half, the equity market witnessed what can be called a correction. The week saw a tradeable decline in the index, along with opportunities for traders to take short positions in individual stocks and make decent gains. Volatility with a downward bias was seen in the market after a long time.
Just as up-moves in the market are not vertical in nature, the corrective moves also will have phases of up and down movements. When indices move up in such down phases, it creates an impression that the correction is over. Many wrong decisions are taken then, with investors taking recently formed top on price charts as right reference price points. Last week was a classic example of this. After falling for three days, Thursday saw a bounce back, only to lose all the gains the very next day.
There is high probability that volatility would increase and the market would see strong southward and northward movements. Savvy investors would use such bounce back to get out of small-cap stocks with doubtful management. As doubtful management is a subjective term, quantitative methods have to be used to determine management quality.
In the last four months, many small-cap stocks have come out of hibernation. For almost a decade these stocks did not perform, and all of a sudden they have started moving up, that too, from one circuit filter level to the next. Their market capitalisation have reached record highs, though an iota of improvement was not seen in their performance over the decade. Suddenly, without any reason, these companies are showing an increase in their top and bottom lines, but their tax payments are not increasing and are not paying any dividend. So, get out of such stocks, which have no fundamentals at all, and move to large-cap during downswings. Having 100 shares of a good company is better than owning 1,000 shares of a bad company.
Rising yields have played the spoilsport in international markets and they keep on bringing nasty surprises. Can this rising yield phenomenon continue for more time? It surely can and that is going to lead to more correction in the equity assets globally. While sometime it may seem easy to play volatility, investors and traders who are not professionals should never attempt to time this volatility.
The only good news for India from the international market last week was that the oil prices, after staying at elevated levels, witnessed a decline. But we do not know if it signals an end to the intermediate upward move in oil. Maybe, we will know in a few weeks. If oil remains under pressure, possibly the Indian market could outperform its emerging market peers, as happened on Friday, when the market breadth recovered sharply.
Most oscillator charts are in the sell mode, but have reached close to their first support levels. The moving average convergence/ divergence (MACD), on the daily chart, is placed in the sell mode with the trigger line placed on the equilibrium line. Though this oscillator is in the sell mode, the difference between the average and trigger line has reached a level where a bounce back tends to happen.
The 12-day rate of change (ROC) has dipped sharply into negative territory and has broken the recent support levels. The 14-day relative strength index (RSI) is placed in oversold territory, but is yet to give a buy signal.
The extreme short-term indicators are largely placed in oversold territory, but some have made the first attempts to move into equilibrium. Over the next two to three sessions, it has to be watched whether these short-term indicators slip back into oversold territory or make an attempt to gain upward momentum.
Coming to short-term support and resistance levels, the low of 10,246 that the Nifty formed last Tuesday is the first strongest support range for it. Over the next couple of sessions, if the Nifty, even in the midst of strong volatility, manages to stay above this level that would be a bullish indication. If the Nifty slips below this range, then the southward direction would get more momentum and take the index below the 10,000-mark.
The first resistance level for the Nifty would come at 10,615, after which 10,750 is another strong, short-term resistance level. More than the level, what is important is the market breadth. If the market opens lower but the market breadth recovers intra-day, then the Nifty would close with gains by the end of the day.
Volatility would increase this week and the market being closed for a day for holiday on Tuesday, it would be better for traders to be cautious before taking any large overnight position.