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Divergent trend in Indices

EXECUTIVE SUMMARY

  • Nifty is into a reaction as are the other indices, so breadth of the market seems to be wide enough to ensure some more continuation of the reaction.

  • News flow is mixed and therefore we may see some consolidation action occur in the Nifty while there could be some continued pressure on Banks and IT. It remains to be seen how far these can pressure the Nifty lower. We can look to Oil Gas and possibly a sprinkling of other stocks to stave off the declines.

  • Pharma was expected to go down and has done so. More pressure seems to be in store. For the moment one may treat all rallies in the stocks as merely pullbacks in an intermediate decline.

  • Profit taking pressure is becoming visible in Mid cap space. But this is wide enough to continue its active appearance. Also, results season may throw up some fresh candidates for investing. So continue to prospect for new names but avoid chasing.

  • Earliest bottoming date appears to be 21st.

INDEX TRADE SUMMARY

  • We are out of Nifty long positions as we booked out some near the highs at 8860 and balance was triggered stop at 8750. For fresh trades we may look at an 8550-8750 short strangle to fetch a premium of around 105-110.
  • Bank Nifty now short if below 18600. Continue to hold. Can add if market is weak this week.
  • Cnx IT can look for some shorts for a quick in and out trade.

STOCK TRADE SUMMARY

  • Results stocks for the week: Hcl Tech/Wipro/Infy and Yes Bank/Hdfc Bank

INDEX REVIEW

The decline continued into the end of the week and set up a bearish candle for the week. As usual, declines get everyone worried and though the nervousness is yet limited, it has begun already. What I had mentioned in my letters in the last week was that the activity level in the market would be high but the indices may find difficult to continue. Nevertheless, swing charts had indicated some improvement towards 8900 and for time limit of Wednesday. We did see the index progress some more (although not till the 8900 levels) and turned around from Wednesday. The letter of 16th had mentioned that we should look for follow thru action in the selling as a sign that the reaction may continue. We did get that from Wednesday highs and this continued into the rest of the week.

In the letter of last Monday I had also mentioned that the prices will be running into retracement resistances and Gann angle lines in the current rise. The letter of Wednesday had commented on the selling that emerged on Monday and alerted readers to lock in profits on existing long positions on indices as well as stocks. I had also suggested that pending longs (after taking profits near 8860) should revise their stops to 8750 and this was duly triggered during the fall. Ditto was the case in Bank Nifty where we fell short of our target by about 90 points and then have reversed to trigger the stop of Monday low (18775). I had also suggested that one could consider going short in the BNF below 18600. This was on the basis that I have been considering the Bank nifty to be in a weaker position compared to the Nifty and therefore was more comfortable shorting that as a near term trade than the Nifty itself. All of these situations were triggered in the last week and if the advice had been followed as directed, one should now be short with the positions in a profit.  For those who would rather be trading the long side (i.e. in line with the larger picture of the market), they should be out of their index long positions and waiting by the sidelines for fresh signals.

 

Over the weekend the news flow has been mixed. On the one hand the local news flow is positive- Reliance results and the double taxation clarification- but the overseas news flow is negative. The Dow was down sharp and China witnessed some sell off. Question now would be whether we would react to local or overseas news flow? My take is that we may spend some time just going nowhere as the newsflow tackle one another. The earning season has begun and the first slew of results have been mixed as well. Mind, the expectation from the Q4 results are pretty low, so I would take that as a positive. With the trends tentative right now, the market would no doubt punish the ones that disappoint. But there are bound to be some that will beat Street expectations (like Reliance did) and the market may choose to reward them. Maybe not on the same day, perhaps after some pullback (as most stocks have moved up anyway) but the key point here is that we are in a bullish phase (we discussed the bigger picture in some detail the last time) and sooner or later, the market players will gravitate towards the ones that have come out with positive numbers. Thus, the approach ahead is rather simple- just go with the names that do well. Therefore it is quite probable that our list of preferred stocks will change as we go ahead. Of course, along with this the market’s reaction to the news has also to be checked. Many counters have moved up (some sharply, like Pharma) and there the market may have already priced it in to a good extent. In such stocks, it would be better to wait for deeper support levels to be reached before entering long. But in stocks that have either been consolidating or those that have not really gained much or perhaps shed some ground, it would be fine to enter long when they hit the first levels of support and show signs of turning around.

In the last letter I had made mention of the situation in the stochastic indicator and how the absence of a strength band may suggest some consolidation ahead. Well, this is the situation right now. The signal can change only if prices were to turn strong from current levels and push to a new swing high above 8873. Leaving that aside for now, lets look for the stochastic signal to play out over the week ahead. I reckon it will manifest with the market becoming quite stock specific than index oriented. Perhaps this may offer option traders some chance to try short options this week. 8550-8750 strangle is priced around 100-110 as per last traded prices. That gives us a decent range to play for the week. If the market churns it will lose some value by end of the week. If one of the options gets priced at the total cost of the strangle, one should exit the position. The big OI position is stacked at the 8600/8500 puts and that can imply market expectations of a lower support while the big call OI is visible at 8800/9000 for now.

NE20041

The attached chart of the Nifty future shows that the prices are down near the moving average bands, the Macd indicator is near the neutral level and the stochastic indicator has turned down from the overbought zone without the strength band indicator appearing either during the recent dip or the advance. The oscillator picture is therefore leaning towards a ranging action and the moving average level can also be taken as a kind of mean area where prices are placed. Sentiment is mixed as well and may want to check the progress of the earnings season before committing to any one side. Thus, it may not be a bad idea to consider short options for those who play this area. Those that don’t do options can wait out this period or engage in day trades or move to stock specific trades based on news flow.

Bank Nifty may not fare similarly as the situation there continues to be a bit weak. Not only was the rally quite muted but the fall seems to be accompanied by more of momentum when compared to the Nifty. Thus I would look for this sector to perhaps bear the brunt of some selling if it were to emerge during the week. Indus Ind came out with pretty decent set of numbers but found no takers in the market on Friday. Problem here is that the support is not too close by and at 18000 or even 17700, does leave some room for declines for one to participate even now.  In the letter of the last week I had already mentioned that this index is a short below 18600 and that remains the situation. I would continue to assert that if the sector is weak early this week, then one can press additional sales or hold on to existing shorts with some expectation of lower targets. In the attached chart note that the last down leg had seen the stochastic indicator develop a strength band and thus the recent rally( weak as it was) just offered an opportunity to enter fresh shorts. The RSI is placed weak as well and prices appear to be breaking the moving average bands. I would most certainly avoid creating long positions in bank stocks until better evidence builds up.

NE20042

In last week letters I had mentioned about the generally weakening situation in Pharma and had warned readers about possible declines. In the last week, Pharma  was the pummelled for a 5% decline! Had also warned about the possible decline in Midcap as well as Auto indices and we can see that these two occurred as well. The Pharma index is down 1255 points and this is the largest loss in price terms in over a year! So definitely some big profit taking in progress here. There could be some rallies but for now expect the upmoves to be rallies only. I would assert that one should continue to stay away from pharma counters for the immediate future.
This week’s sector chart is Realty index. We can see that the first rally moved till the 62% retracemet while the second leg of the rally stopped short at 50% retracement. Prices have started sliding once again. There is lot of activity in the real estate counters but I would gather that this may not be the best time to look at any of the real estate names.

NE20044

Summing up, the overall market may remain somewhat ranged but there could be pockets of weakness like Banking, IT and Realty. These may combine to keep the index under check although Oil stocks may chip in with some gains. But stock specific price action is likely to dominate as earnings season takes hold some more this week. For the ranging expectation in the Nifty a short strangle trade could be tried. However for the Bank Nifty and Cnx IT, we can possibly look for some short futures trades during the week. This week has some IT major results and that should keep this index ticking. So do keep track of this one for trades during the week. Mid cap space continues to be pressured and hence one may be a bit circumspect in buying into this space. Use strong results numbers where market reception to the news is also positive as a cue to invest into some names in the small/mid cap space.

NE20043

STOCKS

Yes Bank and Hdfc Bank are the two main stocks that are due with results this week. Yes is not looking too good on the charts and if weakness persists, it can continue decline till about 780 levels. Anything below that would mean fresh downward price cycle. If that occurs then all rallies will be shorts. But lets check that out after the results on Wednesday. Stock is caught in a range and would need to have some big trigger by way of results to get it out of that range. Current price action is not really hinting at any big expectations. So, barring a surprise, 780 seems to be on the cards here.
Hdfc Bank chart is not too different from that of Yes Bank. Results due here on Thursday. Here too expectations are limited and hence only positive surprises can perhaps take the stock higher. On the downside the supports to look for would be 999 and 983.

HCL Tech is due with results on Tuesday. Stock is reasonably well poised on the chart with the dip drifting down into the rising 1×1 Gann angle support (poised around 910-20 levels and 892 being an important retracement as well as price cycle point. So those are support zones to measure the trend moves by. On the higher side, a clear move above 948 would trigger a new price cycle. So be quite alert here about any positive response to the results. Alternatively, if there is something adverse, then the price cycle trigger area can also function as a stop loss for any shorts that may be attempted by readers.
Wipro is also due with results on Tuesday. At the current price of 590 stock is trading on two Gann angle supports from previous lows as well as nearing the 62% retracement (at 582). More importantly, it is now at the 200 dma level support and that makes it ideal for institutional players to target this name in case some good tidings at the results. On the upside stock does need to get past 615-19 to get into a new price cycle action. So one may need to pace oneself in this stock, seeing the response of the market to the results and the performance of the sector as a whole.
Infy reports results late this week, on Friday. 2125 is currently an important Gann angle support for the stock. I would want to watch what the stock does with this support early in the week before deciding the trends. For the moment there is no bearish pressure. If long protect with 2125 level as stop.

 

 

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