Avoid short positions

The domestic equity markets extended their upward movement in the first week of the new year. The benchmark index Nifty gained by 458.65 points of 2.64 per cent during the last week. The BSE Sensex also gained by 2.6 per cent. The broader indices Nifty Midcap-100 and Smallcap-100 advanced by 1.8 per cent and 1.5 per cent. The Bank nifty was the top gainer with 6.4 per cent and Fin Nifty up by 5.1 per cent. Nifty Pharma and IT indices are down by 2.5 per cent and 1.5 per cent. Overall market breadth was positive for the week. The volatility index went up by 8.5 per cent and settled at 17.60. FIIs bought Rs 1082.83 crores, and DIIs also bought about Rs 3293.28 crores.

On Monday, Nifty opened with a big bang move of over 270 points and ended the week with an indecisive bar. As Nifty closed above the prior swing high and broke out of a downward channel. In all aspects, the market negated all the bearish implications. The index gained first three days and consolidated for the last two days of the week. The 3.3 per cent gain in the first three days rattled the bears. The index consistently took support at 5EMA and moved higher. As the index retraced more than 61.8 per cent of the prior downtrend, we can assume that the trend has reversed on the upside. The index is also above all key moving averages. The 50DMA (17476) is still in a downtrend.

It needs a trend on the upside for a confirmed uptrend. The Nifty formed two small body indecisive candles during the last two days. This price structure shows the upswing is in the matured stage. The Weekly RSI is still below the 60 zone, and the daily RSI is just moved above 61. The ADX is also still moving on southwards. These technical indicators indicate that the trend has strengthened for an uptrend to continue. Any retracement towards the 17476 and a bounce will give a much stronger move. On a 75-minutes chart, the index is trading in an upward channel. It exactly tested the support and bounced strongly on Friday. An hourly close or a strong move below 17760 will give us an initial weakness sign. There are no divergences on any time frame. As the Nifty in the process of a solid directional consensus requires further strength to gain momentum.

What is moving the index is a big question mark because there are only nine stocks in the leading quadrant, and a majority of them are losing momentum. But, heavy stocks like HDFC, Bajaj Finserv HDFC Bank, Heromotoco, and a dozen stocks are building momentum towards the quadrant. Still, a majority of lesser weightage stocks are losing their momentum.

The earnings season is kicking off next week as about over 60 companies are declaring their Q3 financial results. At the same time, the economic data points and Covid-19 spike and its impact on market sentiment are to be watched. As the General budget is just 15 trading sessions away, the market may move mostly within the 17476-18210. It is better to have a neutral to positive strategy on the index and avoid short positions. On the stock-specific front, selective stocks may perform well as the sector rotations are perfectly on. The textile and cement stocks are in focus next week.

(The author is a financial journalist and technical analyst)