Mood’s upbeat, buy on declines

Bulls fought back the downside on the back of strong gains in most global equity markets across the world as Nifty reverses all its losses to settle the week with a gain of 1.6%. While the advance: decline ratio was seen positive on up days, even down days witnessed comparatively neutral market breadth, a sign of exhaustion in selling pressure. Among sectoral indices, CNX IT was the major contributor to the benchmark indices, gaining 4.4%, while auto, metals, realty and oil and gas indices gained 2% each on a week-on-week basis.

Nifty spent most part of the week in a consolidation with a mildly bearish bias and formed a short-term bottom near 5200 levels aided by the daily momentum oscillator, which had turned oversold and sentiment readings from derivative indicators like Volume PCR, which too had reached its lower end of oscillator range. Nifty formed a “Hammer” candle pattern on weekly charts which, as the name shows, indicates hammering out of the bottom. The uptrending trend line drawn connecting the June and July lows came to the rescue of bulls as Nifty instantly rebounded after touching the trend line forcing bears to run for cover. Nifty didn’t even come close to the medium degree make-or-break levels of 5109-5133 and now since even 5303-04 levels are also violated with the Friday’s gap up, the short-term trend has again turned in favour of bulls.

The Bank Nifty also formed a Hammer candle pattern on weekly charts and in hindsight, it now seems that a large 3 wave Flat pattern may have been completed near 9800 levels which carries bullish implications for an upmove towards 10400 or even 10800 levels. Unlike Nifty, Bank Nifty enjoys support from an oversold reading on weekly momentum charts, coupled with an oversold reading on daily charts, which support the bullish implication offered by the Flat pattern. While individual charts of banking stocks, especially the PSU segment, do not showcase any major bullish patterns, short covering can itself produce meaningful advances in the index.

CNX IT, which was the only lagging sectoral index in the defensive space, violated a crucial make-or-break (MOB) zone at 6122-34 on medium term charts while also producing a breakout above a multiple top pattern at 6190-98. Infy and TCS have also violated similar MOB levels and with TCS at a new all-time high, we are likely to witness a bullish sentiment and a buy on declines approach should now be used in most IT stocks.

Reliance managed to hold near the 765-768 make-or-break levels, forming a large bull candle on weekly charts, which indicates high probability of short-term upsides. The probability that the Wedge pattern breakout seen in August was false in nature, which was discussed in previous columns, has now been negated and rallies till 851-865 can be expected. As such, Reliance has already triggered a change of trend on a relative strength basis against Nifty and hence, outperformance is likely to be seen in the former. Oil and gas index also staged a rally from its make or break levels of 8112-8203-8295 and now there is greater likelihood that the index will try to break out above the down trendline near 8600 levels, which will open room for further upsides.

More importantly, US Dollar index has broken the trendline of the “Rising Wedge” pattern which had been in existence for the past one year and this downside breakdown will prove disastrous for the index as a complete retracement towards 75 levels is warranted by this Wedge pattern. This is an extremely positive development for commodities and emerging market equities which have a complete negative correlation with the US Dollar index.

International indices staged a sharp rally fuelled by ECB’s decision of bond buying as S&P500, Nasdaq as well as Germany DAX moving above their 2012 highs. Among Asian indices, Hang Seng witnessed strong support from a short-term rising trendline and a short-term MOB level of 19138 while also forming an W bottom on momentum oscillators, suggesting that further short-term upsides can be seen. Korea KOSPI, one of the strongest equity indices in Asia, formed a notable “Island Reversal” on daily charts which can have sharp upside implications. While Singapore Straits, Taiwan TWSE and Japan Nikkei also bounced back along with their Asian peers, upsides may be limited in these indices or they may underperform for a while as their patterns are not offering many bullish cues.

Overall, the short-term trend has turned bullish and a “buy on declines” approach should be adopted by traders with a keen eye at the 5260-5300 levels, which consists of the sharp gap up of Friday and any decline to this zone would be termed as a natural buying opportunity. Traders should focus on banking stocks for the short term and IT stocks for medium term as these are likely to show sharp upsides from current levels. Traders should also focus on cement stocks as most have reversed from their make or break levels, completing short-term declines. Nifty is likely to move towards the 5400-5450 area in the short run and if a breakout is seen, we can even see a run-up towards 5520-5560 area.

The analysis excludes Saturday’s special trading session.

The writer is senior vice-president, derivatives & technicals, at Violet Arch Securities.