Keep booking profit
After long, the oscillator charts of the Nifty are in clear sell mode, but they lack strength to signal a big correction
It was a week in which the index had corrected marginally, but if you ask any trader or retail investor whether he had felt the correction, the most likely answer would be no. Reason: while the large-caps stagnated and the Nifty corrected, mid-cap stocks had been rising. Though the last two sessions saw some correction in the mid-cap segment, it came largely in batches, with one sector correcting and another rising.
This indicates that a feeling of being left out is playing out on the street. Investors who had missed the bus are now buying into stocks that appear cheap, but are not actually. So stocks of even companies which don’t have a hope in hell are hitting upward circuit filters. How long can this continue is anyone’s guess, but it is time to be extremely cautious on mid-cap stocks.
The earnings season looks pretty much the same as last time’s. Till now some large players have announced their results, mostly on expected lines. Some consumer facing firms declaring their results this week would actually reveal the ground situation.
The international market is glued to the French presidential election on Sunday. Some of the best brains in the world have expressed their concern on how a win by the nationalist National Front might impact France’s relations with Europe and the US. But does this political event has such a deep impact on the market? Let’s take two recent events that were supposed to have major negative impact on markets worldwide.
The first was Brexit and the second was the US presidential election. Both events went against market expectations. Brexit was discounted by markets in two days after the event. In the second event, instead of witnessing a decline, the US market rather headed to new highs. Most emerging markets also inched up close to their all-time highs. Now if the French election result goes against the market wish—unlikely in the first round—there could be some reaction in the short-term, but that would not change the course of global flows. So after an initial reaction, markets would once again move in the direction earnings and international flows take them.
After long, the oscillator charts of the Nifty are in clear sell mode, but their strength does not indicate a big correction. The moving average convergence/divergence (MACD) on the daily charts is in the sell mode as it slips south in positive territory. It has to be seen if it would take support on its equilibrium line. If it moves into negative territory, that would be a bearish indication. On the weekly MACD charts, the average and trigger lines are converging, ready to give a sell signal. It is not often that a whipsaw signal emerges on weekly MACD charts, but when that emerges it is a bullish indication, which means that after a short corrective move, the index would move up even higher. So it is important to watch what signal appears on these charts and for how long?
The 12-day rate of change (ROC) has given a bearish signal as it moves down in negative territory after showing a series of negative divergence. Even the 14-day Relative Strength Index (RSI) has turned southward from right below the overbought territory after showing negative divergence. The other extreme short-term indicators are also in the sell mode as they slip south in equilibrium territory.
The Nifty has broken the extreme short-term support levels by moving below some of its short-term moving averages which had been giving it support in the recent past. So the first support for the index comes at 9,025 points. If this level is broken with a strong momentum, the next support for the Nifty would come in the 8,850-8,875 range and that is where a sense of correction would be felt in the market, even by large traders.
The first resistance to the Nifty in its upward move would come at 9,250, after that 9,350-9,400 is the range where the index would come under profit-booking pressure from traders who have been holding their long positions. But trader have to keep an eye on the mid-cap index. A correction on this index will dampen sentiments and usher in a corrective phase in the Nifty.
rajivnagpal
@mydigitalfc.com
Columnist: 
Rajiv Nagpal