The markets have seen a shift in sentiments over last three weeks, as the weekly charts indicate formation of rising tops and bottoms. The traded volumes have been somewhat lower than the average, which is partly attributed to the truncated weeks, thanks to holidays. In the current scenario, we attempt to second guess the outlook of the near-term trends and our course of action as traders.
The Nifty made a high swing in mid-July at 5,349 which was the first logical hurdle that the bulls encountered. The same has been overcome convincingly, as the index has managed to close above this threshold. If the bulls manage to keep the Nifty spot above the 5,400 levels convincingly and sustainably, the upthrust can gather momentum as the fence sitting bulls along with short covering bears will drive prices higher. In the coming week, the upside potential is up to the 5,450 levels, with an extreme possibility of 5,525 levels if the bulls are really persistent. Declines can test the 5,250 levels. Any decline due to profit sales must not violate the 5,275 (+/- 25 points) levels or the bullish undertone runs the risk of being stalled or even reversed.
Assuming the market witnesses an upmove, traders should keep an eye on traded volumes. Traded volumes are more important during rallies than declines, since gravity and absence of buying can pull down prices. Any rally must be accompanied by higher volumes or runs the risk of petering out without a warning. Ideally, the rally should be broad-based as well, market breadth being positive and the other two (out of three) traded index futures witnessing gains. That would add to the bullish weight of evidence and convince late entrant bulls to enhance exposure on the long side. In the absence of a broad-based upmove, traders should not give up the idea of longs, but may initiate fresh trades on curtailed exposure. Any late pick-up in the broad-based upthrust may be used to enhance long positions later.
In terms of sectors, the rally may be powered by FMCG, pharmaceuticals, oil & gas (E&P stocks only), select banks and sugar stocks. The overseas cues are providing tailwinds to the domestic markets and bullish sentiments are likely to be aided by FII inflows. The rupee’s volatility is higher than the recent average. This should help the overseas investors in their decision-making process to deploy fresh funds in India. With the MSCI emerging market index witnessing an increased weightage for India, expect more inflows from FIIs.
On the weekly chart, the Nifty has overcome the July swing high and is headed towards the post-Budget peak of February 2012. There are a few pressure points along the way, which will see unwinding from bulls who are taking some money off the table. These points are 5,450 and 5,525 where overhead supply can calibrate the recent run-up. A test of the 5,630 level is not ruled out if the 5,525 hurdle is overcome dynamically. Keep an eye on volumes, which must support the price. Traders should keep their ears to the ground for any surprise negative news and hold their longs with a stop loss at 5,275. Should the Nifty rally from Friday’s closing levels, the stop loss should be raised in equal magnitude of the upmove (trailing stop loss). This will ensure that erosion of capital is avoided or reduced as far as possible.
The writer is CEO, BSPLindia.com, and has authored 'A Traders Guide To Indian Commodity Markets'
