Harami cross signals fresh turbulence

Local markets remained subdued last week, closing absolutely flat on a week-on-week basis. Mixed activity was seen in the sectoral space — Oil&Gas and Metals indices were the biggest drags, while FMCG and Consumer Durables managed to pile on the gains. Broader indices Midcap and Smallcap, also remained firm, supporting the market breadth.

Technically, Nifty formed a ‘Doji’ candle pattern on the weekly charts, which indicates indecision. However, this Doji has been preceded by an ‘Engulfing candle’. The combination of these two candle stick patterns will now be called a ‘Harami cross’.

Harami cross at market tops is a loud warning that the previous uptrend could be challenged, or at least a larger consolidation will follow.

On the other hand, the weekly momentum line has produced a double top pattern in the overbought reading, ruling out immediate upsides.

Midcap index is struggling at the 2012 highs and while there is no specific sell signal at current levels, momentum is likely to slow down as the index has violated a key make or break level on hourly charts last week.

Sectorally, the cues are completely mixed with commodity driven sectors like Oil&Gas and Metals showing growing weakness along with very weak charts in the high beta space. Oil&gas index has broken below its short term make or break level of 8496, which suggests a sell-on-rallies approach should be followed.

Metals in the entire rally, showed no promise of entering a bull stage and have now formed bearish candlestick combinations on daily as well as weekly charts. While banking as an index shows no loss of momentum, but if overall market declines we can witness sharp downsides in PSU banks as most of them have been unable to move above their primary make or break levels..

Most importantly, the dollar-rupee pair moved above its make or break level of 53.64 and has also managed to produce a weekly closing above it. This development is the most bearish for equity markets as it means that a credible bottom has been formed in the currency pair.

In overseas markets, Nasdaq composite moved below its make-or-break level of 3044, while Dow Jones Industrial is near its support of 13300. Asian markets remained firm last week, as gains were seen in Hangseng, Japan and Korea.

Overall, there is a cloud of uncertainty, with weakness seen in heavyweights belonging to Oil&Gas and Metals as well as in many liquidity-driven high-beta stocks. Failure of Nifty to sustain above 5700 levels and a corrective pattern which terminated on hourly charts during Friday’s session indicate fresh downsides can be seen this week. A move below 5630, which has been a strong pillar of support lately, can open downsides till 5540-5490.

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