Author: Rajiv Kumar, ICRIER

After a long time, the Indian market has begun to under perform the other emerging markets. On days when emerging and other Asian markets have been gaining sharply, our indices have been witnessing selling pressure.

Are we going to enter a phase of relative underperformance due to our own domestic issues, and secondly, is the market running ahead of valuations? One of the major reasons for the underperformance in the past week was a sharp decline in stocks from the telecom sector that came under attack.

This is despite the fact that in the past few days, the markets have been getting good news. The first good news was in form of the bonus by Reliance Industries (RIL). Although, bonus issues are nothing but a sentimental booster but they are an indication that the company is sure that it will be able to service expanded capital without diluting any sort of financial ratios. This is an indication that over the next few years, RIL is expecting that its expansion, which was taken up in past three years, is going to yield results.

The second major positive surprise was the better-than-expected results from tech major Infosys. Despite the flow of positive news, both these stocks did not witness any sort of strong upward movement after the announcements. This is a clear indication that the market has priced in the positive news flows that is hitting the Street now.

The other factor that could be bothering the market is that the numbers are going to reflect the impact of bad monsoons. The Street could be expecting that some sectors such as auto and consumer durables are going to suffer in sales after the festival season. Some cautious investors are preparing for the coming days and are lightening their positions.

We are clearly witnessing profit booking in the Indian market. Our indices have been the best-performing market in this region. So some kind profit booking is going to take place and that is leading to some corrective movement in the market. This corrective movement is going to continue for some more time but the indicators are still showing that the upward trend, which started in March, is still intact at this point of time.

A strong, bearish phase of the market starts when there are first signs of change in fundamentals and instead of selling due to profit booking, institutional investors start to sell to invest either in other asset classes or emerging countries.

So the market is set to witness a correction and it is the mid-cap segment that is likely to see some more pressure due to higher gains that they had registered in the past six months. So over the next few trading sessions, traders should avoid taking a position in mid-cap stocks.

On the oscillator charts, the moving average convergence-divergence (MACD) on daily charts has given a ‘sell’ signal as the average and triggerline have witnessed a crossover after showing negative divergence. This is a clear ‘sell’ signal after the past few false ‘sell’ alarms that had originated on oscillators during the past few weeks.

On the weekly MACD charts, the average and the triggerline are converging and a ‘sell’ signal might soon emerge on these charts. If a ‘sell’ signal emerges on these charts, then we are likely to see a strong intermediate correction in the Nifty.

The 14-day relative strength index (RSI) has a ‘sell’ signal as it moves southward from overbought territory after showing negative divergence. The other short-term indicators of the Nifty have given a ‘sell’ signal as they move southward from overbought territory and a large number of them are showing a negative divergence, which is an indication that the Nifty is likely to shed some more weight in the extreme short term.

The Nifty has moved below its short-term moving averages that are now going to provide resistance in any attempt by the Nifty to move upward.

The first resistance for Nifty in any attempt to move upward is going to come at 5080, this is the first serious resistance level for Nifty . If Nifty is able to cross this then 5160 is going to be the next important resistance for Nifty. In terms of support, Nifty is at present placed just on its medium term support level. The first short term support for Nifty comes at 4870, after which 4759 is the another strong support level over the next few trading sessions.

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2. The Indian Budget: Give it the benefit of doubt
3. Now for an Indian ‘miracle’
4. Implications of India’s ‘emerging market’ branding

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3. Getting foreign investment policy and China right

This entry was posted on Tuesday, October 20th, 2009 at 10:00 am and is filed under Economic Policy, Financial crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.