Indicators point to pause in rally

The Nifty has closed the week above 5,700 for the first time since April 2011. Last week, the Nifty was up only 12 points. However, given the sharp rally of 500 points in the prior two weeks, it was no surprise the market traded sideways during expiry week. The breadth was positive on most trading days, with mid-and small-cap stocks playing catch-up with the Nifty.

In the Nifty chart alongside, one will notice that in the last few months the market is trending up in a well-defined channel. We have witnessed three higher bottoms at 4,770, 5,032 and 5,215, with the trend line acting as a support on every decline. Similarly, the Nifty is now facing resistance at the upper trend line, where it first found resistance at 5,350 in July. Since then, it has tested this line twice in the current rally. This upper trend line is currently placed at 5,750 and that would act as a resistance for the Nifty in the current rally. It would be imperative for the Nifty to close above this channel for the next breakout move to targets of 5,815 and 5,905.

Further, since we have a monthly closing, it is important to note the monthly RSI (14) chart also shows the Nifty has closed right at the falling trend line. Thus, we need to watch in the next month whether it can trade and close above this line which would suggest the current rally has the strength to make fresh 52-week highs. As of now, this line would act as a resistance and we could witness a pause in the rally with the possibility of a pull-back.

In the event of a correction, the first major support for the Nifty is at 5,536, followed by a deeper support at 5,400. As of now, the set-up still suggests one should buy at every dip. Given the recent rally, one can expect some correction, which would be healthy for our markets in the long run.

Global markets could also play spoilsport. Last week, we saw weakness in the US and European markets, which are poised now for some more correction. Further, the USD index has also bounced back which is a negative for equity markets. Also, the sharp fall in light crude oil suggests October could be a volatile month for global markets.

The rupee has had a good run in the past few sessions. However, it is currently at a major resistance of 52.5-52. One should watch the currency movements, going forward. If we witness a pause in the INR rally and start to see the USD bounce back, be prepared for a pull-back in the equity markets, too.

Thus, I would suggest trading with stops and remain a bit cautious for this trading week. For now, the trade is in bank stocks on every dip in the markets.

The author is director, Modern Shares and Stockbrokers Limited