More legs to the rally

We are seeing stocks zoom 5-10% each day. The smaller stocks are also very volatile. So, profit booking with a trailing stop- loss strategy is a good one to deploy

The market rallied for the first two weeks of this month. September tends to be a trending month and the trend for the month appears to be up. So, till the end of September, I don’t see a major correction coming in. Having surpassed 5,630, the 61.8 per cent (Fibonacci) mark, targets to the upside are open at 5,950 (78.6 per cent) and 6,300 (100 per cent retracement). Trail your stops and hold on to the trend is the advice when the trend is strong. Trying to catch the top will only result in failure here.

In the short term, the midcap indices have underperformed versus the Nifty and there is a lot of room for them to catch up. So, speculative activity into the expiration should be strong. We are seeing stocks zoom 5-10 per cent each day. However, the smaller stocks are also very volatile. So, profit booking with a trailing stop-loss strategy is a good one to deploy.

Last month, there were several inter-market divergences between markets —between the domestic market and the world market, between currencies and the equity markets and between large-cap and mid-cap indices. These could have resulted in a major move either way and by mid-September we got a breakout on the upside, resulting in positive divergences across the board. While the market has been led by banking stocks, metals have lagged and might do a catch-up. Triangles are visible on weekly charts of Hindalco and Sterlite that can give strong follow-up rallies over the next week or two.

The Shanghai index has been the weakest among world markets but is now extremely oversold. It has positive divergences and can reverse its trend at any time. A stimulus is being much anticipated here and can come along with such a reversal, adding to the positive sentiment in the commodity markets. On the other hand, the US and European markets have been leading the rally up and might appear tired and could see limited upside.

Position wise, open interest (OI) in puts is far higher than calls and that makes it a good contrarian call to remain bullish into expiration. The Nifty premium has, however, come down over the last month and is giving an indication of fewer buyers at higher levels for the time being. This is not usually the case, as premiums rise with the market. For now, 5,726 is the immediate resistance level faced by the market, which is 66 per cent retracement above which extensions occur. The mid-cap indices are already showing signs of extensions on the upside and could move up by another three to five per cent from here.

On the weekly charts, we are above most averages and have been rallying for three weeks. Typically, markets move up for four to five weeks, so the coming week should mostly remain positive from this point of view as well. Breadth should also continue to improve as stocks that were not participating in the move join in one after the other. Over the next two weeks, all stocks should have rallied somewhat. The current rally has similarities to September 2010 and September 2008, both of which were bullish months and the market took off when implied volatility (IV) was low and then later IV rose with the market, an unusual phenomenon back then for derivative analysts.

The author is fund manager ProTech PMS & head of technical, Sharekhan Ltd