Some consolidation on the cards
Most short-term indicators are in the buy mode, but they have reached overbought territory, indicating some weakness
It was another week where both the bellwether index and market sentiment stayed bullish and in tandem. More importantly, they were bullish even on a day the international markets came under some pressure.
In the early part of the week, banking stocks saw an upward spike that took the Nifty higher. But on Friday, when profit-booking emerged on banking stocks, IT heavyweights took over from the banks and lifted up the Nifty. Such sector rotation has happened after a long time and that points to the probability of bulls keeping the market under their control for a long period, with occasional bouts of profit booking-led corrective moves.
Notably, Nifty and the broader market shrugged off the disappointment on Wednesday, when the RBI stuck to the policy rates and pointed to its concern about a possible rise in inflation. This again shows the market is under the firm grip of the bulls and decline in prices are being used to create fresh long positions.
As for the earnings season, a large set of companies has declared better than expected year-on-year numbers. Especially the sectors thought to have been affected by demonetisation have exceeded Street expectations. As days come by, it is becoming clearer that the demonetisation dent on the economy had been much less than what most economist had predicted. Some segments of the auto industry have shown year-on-year growth for January, signalling that a full recovery would be happening sooner than expected.
Internationally, some developments in the US, like the appeals court striking down the ban on immigrants from seven countries, helped bolster the sentiment in the financial market that the new US administration might find it hard to implement radical policies. This led to some profit booking in short currency trades in emerging markets, as the US dollar had weakened against a basket of currencies. Even this marginal loss was good enough to stem the fall in asset prices in emerging markets.
The rupee also gained strength, that too without any major FII flows happening, which makes it even better from a macro-perspective. The rising rupee would buffer the oil import bill that has risen in the last few months. Also, emerging market currencies have strengthened to some extent, which would give them the headroom to counter any decline triggered by US Fed statements on interest rate hikes.
Coming to oscillator charts, most short-term indicators are in the buy mode, but they have reached overbought territory, indicating some weakness. But given that macro-formations on the charts are still bullish, this weakness would end in broad, range-bound corrective moves. The Nifty’s intraday movements for the last three trading sessions did show that the corrections had taken place, but mostly as within-range down moves intraday. Since the market breadth was positive then, the market can be seen as still bullish.
The moving average convergence/divergence (MACD) on the daily charts is in positive territory, as they keep moving up in the buy mode. The average and trigger lines on these charts have begun to converge, indicating that a sell signal could emerge soon. But in the recent past, even after convergence, sell signals hadn’t appeared. So, taking an aggressive short positions may not be advisable at this point. If one is keen on taking a short position, take it through the put option, rather than on Nifty futures.
The 12-day rate of change (ROC) in is in positive territory, but there are signs of minor negative divergence on this. The extreme short term indicators are in overbought territory and some have given sell signals as they slip down from overbought territory.
Coming to short-term support and resistance ranges, the first short-term support for the Nifty comes at 8,720, which, if broken on a closing basis, may take the index down to the 8,590-mark, where some of its important support-giving averages are now placed. Also, this level was earlier a strong resistance zone, but will now become a support zone.
The first strong resistance to the Nifty would come at 8,880 after which 9,000 would be another range where the index would face profit-booking pressure. Traders should be equally focussed on protecting their trading profit as they would on earning profits. Just because the market is bullish, retail investors should not overlook the quality of balance sheet while taking long exposure to the mid-cap segment.
rajivnagpal@mydigitalfc.com
Columnist: 
Rajiv Nagpal