Upmoves, if any, will encounter overhead supply

Last week witnessed continued selling pressure as profit sales extended on the back of negative overseas cues and margin calls.
The weekly combined exchange advance decline ratio remained negative as the market breadth was 7,368:14,603.

The capitalisation of the breadth on a commensurate basis was also negative as the figures were Rs34,011 crore:Rs81,359 crore. The total turnover on both stock exchanges (BSE and NSE) spiked higher as the selling pressure mounted. The NSE lost Rs3,14,852 crore in market capitalisation on a week-on-week basis.

Sectorally, the mid-cap sector lost the highest ground as retail players surrendered longs, followed by the banking sector. The technology sector was a gainer on the back of a falling rupee.
Overseas investors were net buyers to the extent of Rs373 crore and that saw the rupee close at the 45.84 levels vis-a-vis the dollar (previous week’s 45.29 levels) as net inflows slowed to a trickle.

Overseas markets too witnessed unwinding as the Dow Jones index lost about 1% whereas the Nasdaq composite gained almost an equal quantum. This partly explains the strength in technology stocks. The UK FTSE 100 lost about a percent in tandem with the Dow.

In the Asian region, Hong Kong led the decline followed by Singapore and Shanghai. The Japanese markets continued to display higher relative strength on the back buying support on all declines.

Domestic markets are likely to witness neutral to negative overseas cues this week.

Technically, domestic markets are showing signs of weakness as the lower tops and bottoms formation remains in place for the third consecutive week and the Nifty has logged the lowest weekly closing after the week ended September 9, 2010. These are signs of pressure and upmoves, if any, will encounter overhead supply as trapped bulls head for the exit every time the markets witness a technical bounce.

This week, the Nifty will encounter 6225 on advances and 5475 on declines. The bullish pivot will be at 5900 levels, which the bulls will have to defend if an upmove is to unfold. The bearish pivot will be at the 5800 levels, below which the bears will continue to prevail.

In terms of a pullback, the 5630-5675 band seems like a band from where a short-term corrective bounce maybe triggered on the back of short covering.

It will at best be a tradable bounce, and not a sustained upmove. Traders will need to continue to exercise caution in the near term and cut back on leveraged exposure as margin calls are likely to keep volatility levels high.