Range-bound consolidation with a bullish bias
When an index touches a new high, the correlation between individual stocks and the index tends to get re-set
After staying in a range for more than seven weeks, the Nifty finally broke the range and touched a new high of 9,450 points on Thursday. Now let’s check what was the difference between the Nifty’s previous all-time high of 9,367 and the current new high of 9,450. A mere 83 points, or close to one per cent. A one percent rise is nothing unusual, so what is so special this time?
By technical theory, once an index or a stock comes into a zone which it had not seen before, it can then move to any level. That probably explains why the index’s one per cent move from 9,200 to 9,300 looked not as exciting as the move from 9,300 to 9,400, because it is gives the hope that the Nifty can now go up further. But this hope has to be handled with care. When an index touches a new high, the correlation between individual stocks and the index tends to get re-set. Some stocks move much faster than the index while others fall woefully behind, especially during corrective sessions.
So, most likely, we will see sharp correction in some stocks on days when the broader market sentiment is weak. Traders, especially those taking mid-cap exposures in futures & derivatives, should keep an eye on such correction, as it points to a change in the medium-to-long-term trend of a stock. Last week, the earnings report of an FMCG company was notable, as it beat street expectations in terms of value and volumes. After the auto sector, all eyes were on the FMCG sector to know the ground situation in the economy to assess if the remonetisation process had aided any recovery in the fourth quarter. That the FMCG company saw a rebound in within one quarter suggests that things were better than what was being feared.

Another key event of the week was the second monsoon forecast, which predicted normal rainfall this year. This forecast gave confidence to the market, which responded with a rain dance on Wednesday. But traders have to track the distribution of rainfall, a crucial aspect, before taking positions in individual stocks. A good monsoon in the country does not automatically push up a company’s sales. Only when the zone in which it operates gets enough rains could a company benefit from the monsoon. So, don’t go for blanket buying in monsoon-related stocks.
Globally, news flows were positive for the market last week. The French election outcome came on the line sought by the market. Also, the Bank of England did not change the interest rates.
Most oscillator charts now exhibit a confused state. They are neither in the buy mode nor are they giving a clear sell signal, as they change colour at very short intervals. The average and trigger lines on the daily moving average convergence/ divergence (MACD) are placed close to each other, as the chart moves sideways and reflects negative divergence. The 14-day Relative Strength Index (RSI) is placed right below the overbought territory, but a negative divergence is visible on it as a long-term trend, though no such divergence is there for the short-term. The other extreme short-term indicators of the Nifty are placed close to the overbought territory as they move sideways and show faint signs of continued weakness.

Going by the overall signals, the oscillator charts do indicate an impending weakness. But the trouble is that this weakness had been visible for almost three months now, but no substantive correction has happened. So it is likely that we may see only range-bound moves in a corrective phase.
The first support for Nifty comes 9,340. The next support would come at 9,270. If both these levels are broken, the next strong support to the index comes at 9,150. The last support comes both from the medium-term moving average and the congestion zone the index had formed on its way up.
rajivnagpal@mydigitalfc.com