August, September will be action packed
This article has been corrected; please read the clarification at the end.
Since the start of the August series, the Nifty Index has shed 13 per cent in open interest (OI) suggesting a good amount of short covering, largely in sectors such as IT, capital goods and banking. Foreign institutional investors (FIIs) seem untroubled by the weak economic fundamentals and below-normal rainfall, going by their investments of $2 billion in India in the past month. This liquidity-motivated rally can be seen in the global markets as well.
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However, these markets now seem to be running into a bit of resistance. This was apparent in India as well when the index gave up its early gains of the week on dismal June IIP data and poor corporate results from heavyweights, such as Bharti Airtel and Tata Motors.
The question now is - is this rally in India here to stay? Analysing the longer term technical chart of the Nifty, one can say with a certain degree of confidence that since Diwali of 2010 the benchmark has been on a downtrend. This downtrend has been interrupted, albeit briefly, by a few counter trend rallies.
There have been four major counter trend rallies in these last two years. First, being the rally in March-April 2011, the second in October 2011, third in January-February 2012 and the fourth being the one we are currently experiencing. I am emphasising these data points in order to explain some important similarities and differences between the earlier counter-trend rallies and the current one. For instance, one common element across all these rallies is that they all witnessed below average volumes, indicating lack of depth and conviction among market players. However, there is one major difference between all earlier rallies and the current one. The stocks that led the previous rallies were confined to the likes of Reliance Capital, Reliance Power, Tata Motors and IDFC. These stocks consistently featured in the top gainers lists but merely represented a three to five per cent weightage on the index. In fact, heavyweights such as Infosys, Larsen and Toubro (L&T), Reliance Industries Ltd (RIL) and ICICI Bank were found to be at the bottom ranks in these rallies. The current rally is being driven by key index stocks such as L&T (up 25 per cent), ICICI Bank (20 per cent) and RIL (15 per cent). Therefore, there seems to be some merit in the current rally.
So, it's only fair to assume that we could see some consolidation (with a slight negative bias) in the coming week, which could take the Index to the 5,150/5,200 levels. The volatility index in India (and globally) is at multi-month lows (long-term support levels) but have recently begun to move up, suggesting a sense of discomfort among investors as the markets rise. Furthermore, in India, FIIs have been buying put options aggressively in anticipation of any such adverse movements.
For the rally to resume, a close above 5,400 coupled with an expansion in volumes is essential. The long-term downward sloping trend line since 2010 will reverse above the 5,400 level and signal a big change in investor and trading sentiment. Good luck with your trading endeavours. August and September are going be action packed months.
The author is head - equities and derivatives, MAPE Securities Pvt Ltd
Correction: The author's designation and company were incorrect, which have been changed. The error is regretted.