Rallying point: 5864 is not too far

It was an extremely pleasant week for the bulls as Fed’s QE3 cheers equity and commodity prices across the globe; Nifty gained a smart 3.9% to settle the week at 5567. Indian ADR index gained over 7% during the week with 3% of its gains coming on Friday itself. Healthy gains of about 4-5% were seen in leading sectoral indices such as banking, oil and gas, auto, realty, metals while defensive sectors underperformed with healthcare closing the week with losses of 1.6%. Advance : Decline ratio remained modestly positive, but the surprising fact was that even on Friday when the Nifty gained 2.5%, the A: D ratio remained flat at best. BSE midcap and smallcap indices were again seen underperforming the benchmark indices with measly gains of 0.9% and 0.4% during the week. The government’s big-bang reforms on FDI in retail and aviation as well as rate cut expectations from the monetary policy, which is scheduled on Monday, are likely to bring opening gains to the next week.

Nifty is now approaching its 2012 high of 5630 and the week is likely to start with a gap up towards this zone. 5630 is an important level as it also regarded as the Dow Theory bull market signal line and once Nifty manages to settle above this level at least for a week, then we can witness even long-term players entering the market. However, technically, while 5630 will attract due importance, traders should also watch 5562 and 5632 levels on a closing basis. Nifty should not close below the 5562 level in the immediate short term since that will activate the possibility of a bearish Wedge pattern that was forming on the daily chart. In case if 5630-32 levels are decisively violated, we can witness an expansion towards 5864 levels, which is the objective as per the suspected Flat pattern developing on the medium term chart.

Oscillator-wise, RSI has produced a double-top breakout on daily charts and that suggests further upsides whereas weekly RSI is testing the upper end of its range, which was responsible for terminating the early 2012 rally. Weekly RSI breaking above the 65 zone will confirm a trend change of high magnitude and then Nifty achieving 6200-6300 would become a high probability.

Sector-wise, auto index managed to gain over 4% during the week and closed above the resistance near 9800 levels which negates the bearish view on auto stocks for now. Oil and gas index produced a breakout with the Friday’s gap up from the Wedge pattern and has entered its most important price cluster resistance of 8636-8719 and 8826-8860, which consists of many geometric ratios as well as important Fibonacci retracements. Reliance Industries, which had produced a similar Wedge pattern breakout, is also approaching the most important test of this uptrend at 851-865 levels and how it reacts to this level will offer further cues as to whether this uptrend is sustainable or not. Vindicating our bullish view, Bank Nifty moved up smartly after completing the Flat pattern discussed last week and has also closed above a short-term objective of 10400, opening the door to a move towards 10800 in the immediate short term.

Dollar index, which had violated a major trend line, plunged 1.5% during the week forming a mega-oversold on weekly oscillators, which confirm the change of trend. The index is now approaching its March lows and the 50% retracement at 78.12 and 78.49, respectively, and some rebound can be seen. European indices, namely UK FTSE and Germany DAX, are now testing resistance from a trendline drawn connecting the 2007 and 2011 highs while in Asia, Hang Seng can face resistance in the 20548-20631 zone, the price cluster of a suspected Rising Flag pattern. More importantly, volatility as measured by US CBOE VIX was seen rising 1% during the week and the measure has rejected the move below the historical support zone of 13-14 levels. This remains a key risk for the global rally since the bull party can face a strong setback if volatility rises from current levels.

Overall, the current rally from 5200 levels is strong and carries significant momentum and it has been observed that corrections in this uptrend were very small, never exceeding 45 points from the high. Since Nifty is near previous highs, if a correction develops over 50 points, then it will be confirmed that the rally has terminated in the immediate short term and a decline or a consolidation can develop. However, a close above 5630-32 levels would be extremely positive for the index and upsides till 5864 are likely to be seen pretty quickly.

CNX Midcap index is testing its make-or-break levels at 7332-7352 and formed a Shooting Star candle pattern on daily charts on Friday. It is imperative for this index to move above this level if further gains can be seen or otherwise the entire move between July and September will be termed as a bearish 3 wave Flat pattern which can bring serious downsides.

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