Mumbai: Nifty’s southward movement intensified last week as the broader market breadth shrank. As we had mentioned in this space earlier, the equity market tends to come under strong pressure during March, and it was no different this year. In fact, the pressure of March correction was higher this year compared with the past, as the market was sitting on huge gains. There are stocks that have risen as much as 300 per cent in the past 12 months. When gains are high, the extent and pace of correction too tends to be high. Be that as it may, it remains to be seen whether this short-term correction eventually turns into a phase of medium-term consolidation. Our assumption is, this would get clearer only over the next couple of weeks.
A part of the ongoing correction has also been due to low expectations from March quarter earnings. Some investors are selling stocks in anticipation of disappointing quarterly numbers. Traders need to watch the behaviour of stocks keenly when these numbers are out. If some of the stocks, which witnessed a correction recently, see a reversal in prices on the day of result announcement, it would indicate the end of the ongoing correction. But if a fresh wave of selling emerges on these counters, which would be evident from stock deliverables data, it would signal that the consolidation might take more time to get over.
Sticking the head out, we would say this phase of decline is still a correction and long-term investors would do well to use this weakness to accumulate stocks with a medium- to long-term perspective. There was no major domestic news flow last week that the market could take note of. Even institutional investors seemed to be sitting on the fences, waiting for the earnings season to kick off before they make their next move. As such, expect volumes to be low this week and Nifty to remain in range-bound mode. For, there are just three trading sessions this week with two holidays making it a long weekend.
This means a trader taking any position will have to take the risk for four days before he could do anything with those positions on either side. When the market opens for trade next Monday, the earnings season would kick in within three sessions. So, even the best of bulls would not like to carry this sort of extra risk. Low volume may mean a sudden increase in volatility in some of the midcap stocks. The market could move strongly in either direction with low volumes and traders should keep strict stoploss, taking this fact into consideration.
On the technical charts, majority of the indicators, both short-term and medium-term, are placed in the sell mode. While a number of the short-term indicators have come closer to the oversold territory, they have still not indicated any change in the ongoing trend. There is a vast difference between reaching the oversold territory and indicating a trend reversal. The indicators have just reached the oversold territory and it might take a while before an indication of trend reversal emerges. The moving average convergence divergence (MACD) on the daily charts is in the sell mode, as it has moved southward in the negative territory. This indicator is not far from its earlier support level and that probably brings hope to the bulls that the correction would get over sooner.
On the weekly charts, a clear sell signal has emerged as it has started moving southward in the positive territory. The 14-day relative strength index (RSI) is now in the sell mode, as it has moved southward. This indicator is placed just above the oversold territory and close to the level from where it had seen a reversal in the recent past. The 12-day rate of change (ROC) is placed in the negative territory, but a sign of mild positive divergence has appeared on this chart. Other extreme short-term indicators are now placed in the oversold territory, as they are moving in the sideways direction.
Nifty is currently placed just above its medium-term support level and should not slip below it. If the index slips below 8,250, the next important support would come at 8,140. This is an important support level and should not be broken for this correction to remain a short-term one in nature and not turn into a medium-term consolidation. Traders should keep an eye on the market breadth.
If the market breadth, especially of banking sector stocks, improves, only then we will see sustained improvement in Nifty. The importance of bank stocks was visible last Friday. There was an intra-day reversal in Nifty only when bank stocks saw a trend reversal. Traders need to keep a close eye on large PSU banks. In any upward move, Nifty is likely to face resistance at 8,470 from the downward sloping trendline. After this, a strong resistance would come at 8,660. If Nifty manages to clear this resistance we could see a short-covering move, which will make the index move higher sharply. For traders, it is time to keep low trading positions and use corrections to enter good quality stocks.
