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Technology May Play the White Knight

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Recap

Last week the markets tested the patience of both bulls and bears alike.

Monday saw a slam dunk collapse. Tuesday to Thursday, it looked like bulls had found their feet again. Markets, however, flattered to deceive the bulls. Friday saw a weak-kneed market struggling to stay afloat.

I had warned you upthrusts would run into a wall of selling as traders exited long positions near breakeven levels. This is known as ‘overhead supply.’

While institutional buying may be seen this week as FIIs and DIIs alike prop prices to massage their NAVs, higher levels will still encounter selling.

The coming week will also be a low volume period as institutional players will be on leave, and turnover will contract. That means the bid and offer spreads (the difference between buy and sell prices) will be wider. This means a trader runs the risk of gaining an entry but will probably struggle to get a clean exit.

These market phases force a trader to exit a trade out of sheer frustration. This year-end may be better than the last 10 years average in terms of volumes due to the spike in retail participation, but institutional presence will be missing.

Rear View Mirror

Let us go through the previous week’s market internals to enable us to guesstimate this week’s market trends.

Immediately apparent from the figures above is that banking stocks led to the fall. I wrote about this last week since the cost of funds is rising.

A weak dollar cushioned falls that would have otherwise been sharper. However, the oil price rise is not good news since it triggers inflation.

Bond yields continue to rise, which means big players expect higher inflation and/or rising interest rates.

NSE market capitalisation rose 0.16% as broader markets (except banks and NBFCs) witnessed sporadic fund buying at lower levels.

Last week I pointed out that the market-wide position limits (MWPL) were not rising as fast as they have been in the past. The MWPL fell last week. This shows traders are surrendering their long positions. Normally the MWPL continues to rise till a few sessions before expiry. This clearly means risk appetite is diminishing.

What’s Hot What’s Not

The RBI held a bond auction totalling Rs 24,000 crore on Friday. The issue received a partial subscription only. Bidders wanted higher interest rates which the RBI did not want to pay.

Bonds worth Rs 7,268 crore were bought by the underwriters (guarantors) to the issue. The RBI is issuing a short-tenure paper on Monday worth Rs 200,000 crore. The outcome of this float will influence Bank Nifty’s short term trend.

Note that the VRRR (variable reverse repo rate) is a short-term borrowing that the Reserve Bank of India governor announced in the last MPC meeting. This means even if this offer is fully subscribed, the RBI will have to keep returning to the market to pick up short term money. Should oil prices rise aggressively, bullish sentiments in the Indian markets may be hit.

Last week saw technology stocks outperform the broader markets. Indian software exports will likely surpass Saudi Arabia’s oil exports in absolute rupee value soon. That kept the sector buzzing with bullish excitement.

Technology stocks have a weightage of 17.84% in the Nifty, which boosted this index compared to the Bank Nifty. Should the technology sector stocks keep the buoyancy going, the markets may see some optimism this week.

Should institutions step in to support the markets, a Santa Claus rally may be seen in the remaining days of the calendar year.

Nifty’s Verdict

The daily chart of the Nifty shows the price remaining entrenched in a bearish channel.

The price remains below the 25-day moving average, which indicates a month-long holding on the cost of an average buyer. The long positions are mildly underwater for now. If the bulls witness any sustainable revival this week, the Nifty will have to trade above the 17,600 level.

That is a fairly stiff challenge to overcome, though it need not be impossible. Since turnover is expected to fall, prices show exaggerated price moves with a little nudge in either direction.

This can be a challenge for short-term traders who are advised to trade on low exposure levels.

Last week I advocated a range between 17,500–16,400 for the Nifty. For the Bank Nifty, I advocated 37,200-34,000. These ranges held perfectly.

The week ahead may see ranges between 36,475-33,200 for the Bank Nifty and 17,550-16,400 for the Nifty. Trade light and maintain strict stop losses.

Have a profitable week!

The author is head of research - Behavioural Technical Analysis, Equitymaster.

Written by Vijay L Bhambwani. Edited by Saikat Chatterjee. Produced by Nirmalya Dutta. Send in your feedback to newsletters@livemint.com.