Sept rocks, 5864 is well in sight

Nifty scored a new 52-week high at 5735, but closed flat for the week, gaining a measly 0.1%. However, September proved to be the second-best month for Indian equities for the calendar year 2012, outperforming all global equity indices. Broader indices – BSE Midcap and Smallcap – outperformed the benchmark ones with gains of 2.7% and 3.1%, respectively, as advance : decline ratio remained firm on up as well as down days during the week. Sector-wise, consumer durables, realty and FMCG posted strong gains followed by moderate gains in healthcare and auto, but heavyweights like oil and gas, metals and IT remained under pressure and suffered losses for the week.

Nifty vindicated our last week’s view of a consolidation, forming a Doji candle pattern on weekly charts, which suggests indecision. However, this Doji candle has formed at the top end of the parallel trend channel that Nifty has been forming since the June lows. Also, while Nifty formed a new weekly high, BSE Sensex formed a lower high creating a negative divergence between these two indices. Also, while Friday witnessed a breakout of the weekly consolidation, the daily chart formed a Gravestone Doji, indicating overhead resistance.

Among defensive sectors, BSE Healthcare reversed from its make-or-break levels placed at 7341-7366 while BSE FMCG index formed a fresh 52-week high, suggesting the uptrend in defensives is still very much intact. CNX IT, which remained under pressure during the week, may be forming an Elliot Zigzag pattern which is likely to terminate at or near 6225 levels while Infy is near its make-or-break levels of 2497 and TCS is testing its previous double top breakout level. If these levels are defended and considering that CNX IT has signalled a bullish breakout on medium degree charts a few weeks ago, we can witness moderate upsides in the immediate short term.

Consumer Durables index, which had completed a major degree Elliot Flat pattern in December 2012, is about to produce a very important breakout from a trendline connecting the tops of November 2010, July 2011 and February 2012. Also, a weekly close above 7000 will produce the first higher high in the past two years underscoring the importance of this breakout and sharp upsides are likely to be seen in short to medium term.

BSE Oil and Gas index continues to struggle at the make-or-break zone of 8826-8862 and was also seen forming a loose Evening Star candle pattern on weekly charts, which may have bearish implications. Traders are likely to focus at 8496 levels on the index, which remains the key trend decider in the extreme short term and any violation of this level would mean more trouble for the index. Similarly, Reliance Industries, which was unable to sustain above its medium degree make-or-break levels of 851-865, faces test of support at 816-826 below which a major decline could take place.

Metals, which remained weak during the week, faced resistance from its make-or-break levels at 10725-10915. The index had completed a 5-wave decline in September near the 9200 level and the recent rally had formed a bullish mega overbought on non-normalised oscillators, suggesting further upsides. However, unless 10725-10915 levels are violated, the argument of a major bottom near 9200 levels will stand challenged.

European markets remained under pressure during the week, with French CAC dropping about 5% and Germany DAX losing about 3%. UK FTSE was also seen dropping 2% while US Dow Jones Industrial sustained losses of about 1%. As noted in previous columns, European equity indices like FTSE and DAX were facing resistance from important trendlines and most of these indices fell short of testing their early 2012 highs. However, most of these indices are near their important support levels; Dow Jones industrial faces its make-or-break levels at 13338/13290 and FTSE is approaching 5678-5685 and hence, the current decline may prove to be short-lived.

Hang Seng managed to stay above the pattern resistance of 20548-20631 which is a huge positive and a strong rally is expected, potentially helping other Asian markets to remain firm in the immediate short term. Chinese Shanghai Index, which has been a long term underperformer in Asia, has reversed from one of its geometric objectives near 2026 with a strong thrust, gaining 2.6% on Friday and forming a strong bull candle on daily as well as weekly charts. Korea KOSPI and Taiwan Weighted are also showing bullish charts and are likely to move up after brief consolidation while Singapore Straits and Japan Nikkei, which are not showing any major bullish patterns can underperform and remain under pressure.

More importantly, Dollar index reversed from its short term support near 79 and is now facing an important test of resistance at near 80 levels, which is its short-term trend decider. The index has formed a mega-overbought signal on weekly charts, confirming a major trend change to bearish while on short-term charts, it’s forming a Negative Reversal, offering downside targets of 77.50 levels though we are quite confident that our medium term target of 75 levels will also be achieved overtime. Domestically, the rupee was seen strengthening and is now approaching its medium term resistance of make-or-break level near 52.20, which is the most important trend decider to be watched.

The action is likely to shift to broader indices in coming weeks, with small cap stocks expected to stay in focus. BSE small cap index had completed a zig-zag pattern in May 2012 and now since it has moved above the important pivot and the July 2012 high of 6870 levels, a sharp upside is likely to be seen in the index. Support for Nifty is seen at 5630-5650 level, which is the previous breakout point and more importantly, at the 5615 level which is now the new trend decider from a short-term perspective. Upside objective of 5864 remains intact in the extreme short term albeit some consolidation or correction can develop at current levels due to the trend line resistance and down trending momentum on daily charts.

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