Volatility likely as markets are mildly overextended

Last week was a bullish one along expected lines as the buyers prevailed over the sellers.

The headline indices scaled higher tops as the Nifty tested levels seen in January 2008. The weekly combined exchange advance decline ratio was negative as the figures were 9684:12143. The capitalisation of the same on a commensurate basis was also negative as the figures were Rs49,323 crore:Rs59,419 crore.

The NSE gained Rs2,00,303 crore in market capitalisation over the previous week. In terms of sectoral movement, the banking sector outperformed its peers by a wide margin, with the technology and mid-cap segments bringing up the rear.

Overseas investors were net buyers to the extent of Rs7,863.3 crore, which saw the rupee close vis-a-vis the dollar at 46.48 levels (against previous week’s 46.48/$ levels). The US markets saw the Nasdaq Composite gaining ground over the old economy Dow Jones index and that points towards the likelihood of the domestic technology sector witnessing some follow-up buying action this week, barring some unforeseen circumstances.

The UK FTSE 100 closed with little change over the previous week, indicating under-performance vis-a-vis the US benchmarks. The Asian region saw the Nikkei 225 and the Hang Seng lead the bull charge from the front and the Singapore markets bring up the rear. The Shanghai Composite index ended in the red and can possibly trigger some unwinding if the bearishness persists.

Technically, the domestic markets have confirmed a bullish breakout which was triggered in the prior week. That the markets are mildly overextended in the near term is a given and therefore, bouts of high volatility are the logical sequence to the upthrust.

The weekly thresholds advocated for the Nifty between 5375/ 5750 were overcome on the upside as the bulls went into overdrive. This week is likely to witness a range of 6075 on advances and 5725 on declines, below which 5525 may be tested if the de-leveraging process gains momentum on declines.

The bullish pivot for the week is at 5800 levels and the bearish pivot at 5725 levels. Traders are advised to nurse existing longs and watch declines keenly. If volumes and open interest expand on declines, the fall may be relatively sharp in the absolute near term. The overall outlook stays positive.

lachman.ramchand@gmail.com