Markets likely to be volatile

The benchmark indices of the Indian stock market opened at a new lifetime high at the beginning of the last week, but fell sharply for the first three days. At the close, Nifty lost 104.10 points or 0.84 per cent. The BSE Sensex also lost 0.8 per cent during the week. The broader indices continued to out-perform the benchmark indices. The Nifty midcap-100 and Smallcap-100 indices gained by 1.6 per cent and 0.9 per cent respectively. On the sectoral front, the Realty index gained by 1.4 per cent and Media index rose by 1.1 per cent. On the downside, the Nifty Energy index fell by 2.5 per cent and the Metal index dropped 2.4 per cent.

As we are entering into the budget week, the Nifty formed the bearish engulfing pattern on a high volatile move. Interestingly, the week started with a bearish engulfing pattern on a daily chart and fell 342 points in just three days. The Nifty actually reacted from trend line resistance. But the sharp recovery of the last two days did not cross the 50 per cent retracement of the fall. This sharp recovery was mainly due to the short covering. The 50 DMA acted as a support. The last two days of price action can be considered as a pullback only.

In any case, this pullback sustained above the 12,300 (61.8 retracement of the fall) for at least two days. As the major economic event schedule this week, the possibility of index reaching a new high is very low. The Nifty may sustain within the range for next five trading sessions with highest possible volatility. There is no change in indicator set-up as the negative divergences are still continuing. The positive observation is that Nifty did not make any swing low. If Nifty falls below the January 22 low i.e, 12087, the minor uptrend will be in danger. The current uptrend will reverse to the downward direction if Nifty falls below 11929.

The major sectoral index, Banknifty, is still below the short moving averages even after the sharp bounce of 650 points from the Thursday's low. No positive divergences is visible, as of now. The out-performance of broader indices is continuing. The Midcap and Small caps are sustaining above their 200DMA and many trend reversals are also visible. These two indices are yet to make a higher high on a weekly chart.

As we suspected earlier, some of the big companies failed to meet expectations in the earnings domain. That way, this earnings season is becoming dull in all aspects. This trend is reflected in the Nifty Price-Earnings (PE) ratio. The earnings are not growing rapidly while stock prices are at lifetime high, resulting in high PE again. Nifty PE ratio reached 28.10 once again. As we discussed in the past, it is time to be cautious in the wake of the high PE scenario. However, the General Budget could be a trigger point for the decisive market direction.

Sitting sidelines could be a better strategy for the next week. Long positions can be considered above 12,300 levels with a stop loss of 12150. But at the same time, shorts can be built up below 12120 with a stop loss of 12220. The targets are open to both sides. Risk and money management is critical.

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