Early signs of weakness in market

Sectoral indices have shown a mixed trend in the week but BSE IT was a clear winner from the pack, with more than 7% rise

Last week, the markets started positively as the Nifty touched a two-year high of 6,042.15 on Monday but closed below 6,000 the same day. A number of large- and mid-cap stocks are showing negative divergence on the charts, with many forming a pattern of double tops and head and shoulder, the first signs of weakness in the market.

Sectoral indices have shown a mixed trend in the week, but the BSE IT was the clear winner from the pack, with more than seven per cent rise on the back of prominent gains in Infosys, Tech Mahindra and Wipro. Lagging performance was witnessed from the BSE Capital Goods (down 5.01 per cent) and Consumer Durables (down 4.23 per cent). Fast-moving consumer goods (FMCG) stocks, too, showed underperformance (BSE FMCG was down 3.72 per cent), while Healthcare and Banking indices remained flat. The market breadth was clearly on the negative side last week, as the BSE Midcap Index lost more than two per cent.

Not just Indian markets, even the US markets are developing negative divergence in major stocks. The S&P 500 in the US is forming a rising wedge on long-term monthly charts, from where if a breakdown takes place, it could have a serious negative repercussion on other world markets. Silver and gold are anyway not moving up.

The moving average convergence divergence and relative strength index indicators have shown formation of negative divergence on daily charts. This is a latent technical weakness. Normally, a trend break is needed in prices to confirm reversal from this phenomenon. Immediate support level for the Nifty is at around 5,920 and any break below this level would confirm the lagging trend in oscillator charts.

Though outperforming in 2012, cement stocks have, in 2013, remained under pressure – ACC, Ambuja Cement, UltraTech and Grasim are close to 200-exponential moving average (EMA) levels on the daily charts and sustenance below this average would correspond with underperformance in these stocks. Banking stocks are expected to remain trading favourites in the near term – Kotak Bank, HDFC Bank and Federal Bank have moved below 26-EMA levels and could remain under pressure in a market decline. Cairn is trading comfortably above important moving averages and close to a breakout above Rs 350 levels. Once that happens, we can witness the stock extending its rally in the near term. Tata Global has seen some selling pressure this week, breaking the support line of a triangle pattern, which indicates sustaining below Rs 166 levels. The stock could move lower in the near term. FMCG stocks such as HUL and ITC, trade below 100-EMA levels and might continue to show lagging performance this week. CNX Midcap Index has shown some profit-taking in the last three sessions. And, if these stocks continue to underperform, it can later affect sentiment negatively as most of these belong to the cash market segment.

In conclusion, keep a watch on three things, viz, a breakdown of 5,920 levels on Nifty, a weakening rupee and a fall in US markets, which could trigger a sell-off. Else, the markets are likely to consolidate for some time between 5,920 and 6,050 before the next rally. A reduction in interest rates could be the next trigger for the market, as interest- sensitive sectors like banking, realty and auto are still holding to their gains.

The author is EVP and head - retail research, Religare Broking