Focus on promising mid-caps

The Indian stock market sharply bounced after a nosedive kind of fall last week. The benchmark index Nifty gained 436.5 points or 3.74 per cent and the BSE Sensex rose by 3.5 per cent. Both indices recouped the last week's losses in just four days.

The Nifty Midcap 100 index gained by 4.7 per cent and Smallcap 100 index advanced by 2.9 per cent. On the sectoral front, Nifty metal index surged by 9.28 per cent during the last week. Niftybank index gained by 4.63 per cent and Pharma index 4.09 per cent.

The bounce in the market came with a surprise. After a sharp decline or surge, market generally consolidates for a period before taking further decisive move. This time the "V" shape recovery came without a bottom formation.

The sharp upsurge is a 66 per cent retracement of prior down swing. The 66 per cent recovery of 11-day downswing happened in just four days. Another interesting point is the sharp recovery.

The Nifty closed above the 50DMA and stayed there just for one day. Along with the bearish engulfing pattern, Nifty closed below the 5DMA and made a lower high, lower low and a lower close.

It faced multiple resistance points and supports prior to that. In this scenario, if there is a close above Thursday's high, the recovery will continue. Prior to this, a sharp recovery from January 8 to 14 did not sustain for a long period.

After four days of the tight trading range, it fell sharply. This kind of "V" sharper recoveries will not sustain the momentum for a long period. Unless a flat base pattern or a corrective consolidation pattern forms, the trend will not be trustworthy.

The derivative suggests that the short squeeze in the market is the main reason for this sharp bounce. On Friday, Nifty formed a bearish engulfing pattern at the resistance point. This kind of bearish patterns at resistance point have more relevance than elsewhere. Thursday's high is a multiple resistance/ support area. Eventually, the index is reacting to that.

Even on Thursday if you look at an hourly chart, most of stocks traded in a range after opening with a gap and finally formed indecisive bar. The last two days' price action indicates that the aberration of the price is exhausted.

In case, markets move above Thursday's high 12161 and sustain there, then the bulls will have an upper hand. The next resistance is placed at 12272, which is a prior swing high. We cannot forecast beyond this at this juncture.

The RSI is still in the resistance zone. For the past two months, it tested 70 zone on an hourly chart. The MACD histogram is almost zero, indicating a possible positive move if the index clears the resistance. But the hourly chart indicates bearish momentum.

The ADX, which shows the trend strength, has not improved even after four days of sharp upswing. It actually came down from 21.55 to 18.70, which means that the last week's surge is a weak one. The next two days' price action is very crucial for near-future trend.

In case the Nifty closes below the prior bar low, that could be the first sign of weakness. In that case, a close below 12075- 12032 will lead the fall up to 11929.

This is the level of the prior base, where we may see some buying interest. But below this level, we expect sharper decline again. It is the time to be cautious unless markets move out of resistance zone.

The budget proposals did not enthuse the markets initially, and it has not been a booster for the market. Moreover, the earnings are not so encouraging as of now.

Unless there is improvement in earnings, we cannot expect markets to move up and up. Focus on some mid-cap stocks which have shown an improvement on the earnings front.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)