Rise in dollar, bond yield impacts market

The trend and the sentiment in the equity markets were affected because of a spike in the US Treasury Bond yields, which had its obvious effect on the emerging markets. The spikes and the strengthening US Dollar index caused some gap down opening and corrective moves in the Indian equity markets, particularly in the second half of the week.

The BSE Sensex lost 2.7 per cent. The broader indices, Nifty Midcap-100 and Smallcap-100 outperformed 3.5 per cent and 3.9 per cent, respectively. On the sectoral front, barring the PSU Bank index, all the indices closed higher.

PSU Bank index down by 2.2 per cent. Nifty Media index is highest gainer with 6.6 per cent. The FIIs bought Rs 2,199.74 crore during the first week of March and the DIIs sold Rs 2,635.39 crore. Many of the large-cap stock underperformed compared to the mid and small caps during the last week.

In the last seven days, there are four gap ups and three gap downs. Interestingly, all the gaps are over the 100 to 250 points range. In these huge gap openings, positional trading has become walking on a razor edge. After breaking out of last week's high, the Nifty failed to sustain above it. Because of this failure, the previous week's confirmation of the bearish engulfing at lifetime is still valid. The Nifty gained 408.95 points since last week's close, but the bearish shooting star candle on daily and weekly charts. In fact, last week's candle is an inside bar. So, 15,177-14,467 range is an important support and resistance for next week.

The Nifty closed below the 20DMA again with a bearish candle. The critical 50 DMA support (14,585) is just 2.42 per cent away from now. Earlier, since October 30th it worked as support. During last week too, it exactly took support at the 50DMA. For a bearish confirmation, the Nifty must close below 14,585 for at least two days. Below 50DMA, the previous week's low of 14,467 is another short-term support. The upward trend line is also at a similar level. On post budget day, the gap of February 2nd, 14,336-14,469 is also a support for the market. Below these levels. On the upside, closing above the 15,100 is important; above 15,200 will resume the uptrend again.

Indicators again fell below the 20DMA, and the negative divergences still present in the RSI. The Nifty registered a failed breakout as it closed below the breakout level. At the same time, it also closed below the previous day low.

On the 75 minute chart, the Nifty came inside the channel again. The bearish momentum has increased again because of the last two days of fall. As mentioned earlier, the ADX declined further and continued to be below the -DMI and +DMI. Also -DMI is moving above the +DMI. This structure shows the weaker trend strength. Below this level, the previous week's low of 14,467 is another short-term support. Below these levels, the market will change its status to a clear downtrend. On the upside, closing above the 15,100 is important; above 15,200 will resume the uptrend again.

The bond yields and dollar index rise is impacting the equity market because of their inverse relationship. Let us wait and see whether the bond yields and the dollar index will continue to rise or take a breather. The FII flows completely depend on their movement. The domestic market is already experiencing profit booking in a scattered manner. Moreover, the India VIX closed above 25.5 level, which is negative for the markets. This VIX is making higher highs and higher lower for the past few weeks. This is an indication of the volatility going to be increased in the near term.

As the calculation of Price-Earnings is also changing, there is no relevance for PE anymore. The changes are looking for convenient changes according to the market condition. The price-book value ratio is still over 12 years high. In these conditions, many of the fundamentals lost their relevance in overall market conditions. Individual stocks still outperforms the broader market because of many reasons.

This is the reason the market has become a highly selective market. The defence sectors like FMCG, IT and Pharma will continue to show relative improving strength. Since the US bond yield spikes and strengthening dollar will continue to have their overhang on the markets, we recommend staying highly selective, avoiding leveraged exposures on either side and protecting profits with every move in the markets.

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