Consolidation likely in expiry week

It was a volatile week for the bourses as the Nifty touched a new 52-week high on continued buying by foreign institutional investors and closed firmly above the early-2012 high of 5630.  Banking, capital goods and realty indices posted gains of 7-9% each, while the defensive sectors — IT, FMCG and healthcare — posted losses, indicating risk-taking sentiment in the market.

The broader Midcap and Small Cap indices outperformed with about 3% gains each, keeping the advance:decline ratio firm throughout the week. Volatility, as measured by VIX, also rose 23% during the week, a rare phenomenon last seen in October 2010 when VIX accompanied the rally in Nifty towards the 6300 highs.

Nifty formed a “Hammer” candle pattern on weekly charts, which is not an ideal pattern to be seen on a medium-term breakout. 5630 was not only a medium-term swing high, but also regarded as a Dow Theory bull signal line. Another weekly close above this level is required, preferably on a strong bull candle, for confirmation of the breakout.

Weekly relative strength indicator (RSI) moved above the 65 level after over 18 months, confirms a bullish breakout from an oscillator perspective. While momentum on daily and weekly charts remains overbought, a sell reading has not yet been produced, suggesting continuation of the bull trend.

After weeks of underperformance, BSE Midcap index finally showed some strength as it closed above the July high of 6307. It is likely to surge towards the early 2012 highs of 6650 in the immediate short term. BSE Small Cap index, which had completed a zigzag correction in early June 2012, is now moving towards the July high of 6870 levels. A breakout above this high will be extremely bullish for the index and a strong surge can then be seen in Small Cap stocks.

Bank Nifty has also moved above the July high of 11227, forming a strong bull candle on both daily and weekly charts, and is poised to move towards 11594 and even 12431 in the extreme short term. A few PSU banking stocks seem to have completed large patterns and it seems that the current outperformance in these counters is just the beginning of a  large upmove. Most indices, including auto, realty and especially metals and capital goods, seem poised for further upmoves as patterns continue to show a bullish undertone. Among defensives, BSE Healthcare faces its short-term make-or-break levels at 7341-7366 while BSE FMCG index is also approaching its short-term make-or-break levels near 5082-5084. How these indices react to these levels will offer further cues about the short-term trend of defensives in general.

Support from the heavyweight sector, BSE Oil & Gas index, remains the biggest challenge for the markets as the index is still testing its medium degree make-or-break levels at 8826-8862, while bellwether Reliance Industries also struggled to move past its make-or-break levels placed at 851-865 forming a ‘Doji’ candle pattern on weekly charts suggesting indecision. Also, stocks like GAIL and Cairn have formed diagonal patterns on their daily charts, which carry bearish implications in the immediate short term.

Among global equity indices, Hangseng has moved above its pattern resistance of 20548-20631, but formed a Doji pattern on weekly charts suggesting indecision. Japan Nikkei seems to have formed a triple top pattern on its daily chart, which could bring some short-term downsides, while Chinese Shanghai index continues to tests new 52-week lows.

However, Taiwan TWSE & Korea Kospi are showing significant strength and are likely to move forward in the immediate short term. European markets continue to test trendline resistance drawn connecting 2007 and 2011 highs, and further cues are awaited.

While the overall trend now stays strongly in favour of bulls, there is likely to be some consolidation at current levels as September derivatives expiry draws near. Nifty faces strong support at its short-term make-or-break levels of 5599, while the previous breakout zone of 5630-50 will also be watched by short-term traders. It is highly essential for the Nifty to keep its head above the 5630-50 levels this week and another appearance of a bull candle is required to confirm the breakout. Short-term projections are placed at 5864 and only if this zone is violated, we can witness a surge towards 6200-6300, which the street has now started expecting.

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