Breakout above 5720 will spark gains

Indian markets were seen volatile, but managed to post gains of 0.5% on a weekly basis. Among BSE sectoral indices, consumer durables rallied 5.1%, auto added 3.9%, healthcare gained 3.2% while IT rebounded over 2%. However, capital goods, oil and gas were seen posting moderate losses. Midcap and small cap indices performed in line with benchmark indices and hence, there was no real breakdown in the market breadth as measured by the advance: decline ratio.

Last week, we argued that a breakout from the “Double Doji” candle combination, which created the range of 5630-5720, usually takes prices far away from the breakout point. However, this wasn’t seen to be the case as Nifty violated the 5630 support on the downside after being disappointed with the RBI monetary policy. However, the decline lasted for only that particular day and Nifty was seen rebounding from its short-term support near 5580-5587 and has now approached the upper end of the range of 5720, completely negating the bearish outcome of the monetary policy. While the recovery gives stimulus to hopeful bulls, the breakdown is still considered real unless 5720 is crossed. In an event where 5720 is decisively crossed, the previous breakdown of 5630 would be considered a failure, which would set the stage for a sharp rally on the upside.

While a smoothened momentum on weekly scale remains overbought, the daily counterpart has produced a double bottom buy trigger, which could support upsides in the extreme short term.

Technicals of various sectoral indices are showing mixed interpretations with the consumer durable index showing signs of an upside momentum, post the major breakout a couple of weeks ago, while metals and the oil and gas index remaining below their short-term make-or-break (MOB) levels, indicating weakness in the price structure. Bank Nifty might have completed a Flat pattern, which is a 3-wave corrective pattern, usually preceded by strong uptrends like we saw in early September. However, the index needs to move beyond 11538 in the extreme short term and may also face minor resistance at 11650 levels. On the other hand, BSE PSU index, which has been declining for the past few weeks, seems to have hit a major price cluster support of 7058-7087 and has reversed from this area, indicating further upsides. BSE Power has also reversed from its MOB of 1969-1984 and provided it moves above 1996 on a closing basis, we are likely to witness good upsides.

Analysis of inter-market and global equity indices posts another challenge in interpreting the short-term trend for Indian markets. US Dollar index closed at a 2-month high breaking out above the resistance of 80.31 and is likely to post further upsides while dollar-rupee pair continues to remain in a short and medium term uptrend as long as 53.60 is defended. US equity indices – Dow Jones Industrial and tech-heavy Nasdaq – remained below their respective make-or-break levels, forming bear candles on weekly charts, but European markets continued to exhibit superior strength and are not yet showing any signs of weakness, apart from the resistance due to the trend line connecting 2007 and 2011 highs. Hang Seng managed to defend the MOB of 21400 and rallied strongly to break out above the February 2012 high, indicating strong momentum. However, Korea and Taiwan remained below their respective short-term make-or-break levels and suggest further weakness. On the other hand, Chinese Shanghai Index seems to be forming an “Inverse Head and Shoulders” pattern, which carries bullish implications if a breakout is seen above 2138.

With so many mixed signals from inter-market as well as intra-market components, the interpretation of the short-term trend remains a key challenge. Strength in the dollar indicates trouble for equity markets while at the same time, most benchmark, broader as well as sectoral indices have not violated their short-term trend deciders. Traders should watch at 5720 now as any breakout above this level can prove to be highly rewarding for long positions.

Traders should also remain selective by going long on consumer durables, capital goods, private banking, PSUs and the like, and subsequently going short on commodity-driven sectors such as oil and gas and metals since most commodities including gold, silver, copper and crude are showing a sharp downtrend anyway. Traders should watch 5580-5587 in the event of a decline and only once these levels are violated, we can witness downsides towards the primary price cluster of 5500-5538, which is the largest degree trend decider for now.

The writer is senior vice-president, derivatives and technicals, at Violet Arch Securities.
Views expressed here are his own