More consolidation ahead
The next two sessions will show whether or not the Nifty will see a decent tradable correction. The index will either move below its support giving short-term moving averages or consolidate around the same
Once again, a scare visited Dalal Street last week. It happened on Thursday. The way the Nifty slipped below its day’s high along with the weak market breadth gave market players a feeling that finally the long-feared correction is about to start. It didn’t matter that the index closed flat that day.
After many months, weakness witnessed in one trading session continued to the second day. On Friday, after opening almost flat, the Nifty slipped sharply. The market breadth was also weak. A funny thing about correction is that while everyone waits for a correction, when the correction actually happens, most of them rush to the pooja room. The next two sessions will show whether or not the Nifty will see a decent tradable correction. The index will either move below its support-giving short-term moving averages or consolidate around the same. But for the retail investor and those who have entered the market in the last six months, trading sessions like last Thursday’s and Friday’s are a reminder that it is important to stay with quality stocks and differentiate between investing and trading positions.
While investing one should avoid panic and in trading, avoid complacency. At this point, the first thing retail investors need to do is to get rid of poor quality stocks from their portfolios. The reason we bring this to the fore is simple, as the Nifty stays at elevated levels, there would be corrective phases in which mid-cap stocks would correct sharply and if one is stuck with poor quality stocks, then probably even in a bullish market he or she would not be able make returns that a bull market usually delivers.
There was nothing in domestic news flows to write home about. But surely, by the end of this week, when the market would be closed, the much-awaited goods and service tax (GST) regime would be rolled out. Over the next two months, there would adjustments in the sales of many companies; some might see a spike and some, a slowdown. While investors can ignore these short- term dip in sales, for traders, this presents an opportunity to take advantage of volatility in individual stocks. But one thing both traders and investor should avoid is to trade on GST impact rumours, which are going to fill the street over the next couple of months.

In international news flows, the much-awaited shift in MSCI weightages was announced last week. Last year, when it was announced that the weightage of China would increase on the MSCI Emerging Market Index, the Indian market saw a sharp corrective phase. But when it actually happened, there was no panic, probably for the reason that the increase in the weightage of Chinese stocks was much less than being anticipated. Moreover, the actual change happened over a period of time that emerging markets had enough got enough time to adjust to the events. Such reactions indicate two things; first, plenty of money is still waiting to come into the market. Second, investors and traders are in no hurry to sell.
Coming to oscillator charts, most short-term indicators are in the sell mode and some are about to come in the sell mode. But those in the sell mode cannot be relied on to take aggressive short positions, as they have changed their colours too often in the last six months. But if the Nifty moves below some of its stronger support levels and the longer term indicators start to show weakness, then short positions can be taken.
The moving average convergence/divergence (MACD) on the daily charts is placed in the sell mode, as it moves south in positive territory. In case it fails to take support on the equilibrium line and the difference between the average and trigger lines is significant, it would be an indication of trouble for the bulls.
The 14-day Relative Strength Index (RSI) is now in equilibrium and has also turned south after showing negative divergence. This makes it slightly more bearish than other charts. The extreme short-term indicators, like stochastic, is in the sell mode as they slip down in equilibrium territory.

Coming to short-term support levels, the Nifty has closed below its 20-day moving average (DMA), but is still to clear the filter test. The panic seen on Thursday and Friday was due to a long weekend— Monday being a holiday—and rollover-led fears. Whether it was also because of large delivery-based selling is not known, but this would be known by Tuesday evening. If this was a rollover-based correction, then the Nifty would take support at 9,540, the level where its 50 DMA hovers, but if it is more than rollover, the index would seek support in the range of 9,380 to 9,420. Retail investors have to note that if the Nifty fails to take support on its 50 DMA, then the breadth of the mid-cap segment is going to suffer more.

rajivnagpal@mydigitalfc.com
Columnist: 
Rajiv Nagpal