Focus on risk management while trading

Last week, the domestic stock markets closed in green on a weekly basis. But it was a tight range trade as markets continued losing streak in the first two days. As consequence, market fall continued for eight days, which is the longest streak of decline in the last two months.

Though markets rebounded sharply, they could not demonstrate faster upward movement in later days. The Benchmark BSE Sensex closed 62.53 points higher at 35871.48 and the Nifty closed at 10791.65 with a 67.25 points gain.

Another major index Bank Nifty managed to close with meagre 73.3 points higher at 26867.55. The broader market indices Nifty Midcap-100 gained over 328 points or 2 per cent while Small caps closed 100 points or about 2.65 percent higher.

Nifty bounced from a crucial support 10585 with more than a percentage gain in a single trading session, but the momentum slackened. IT and FMCG sectorial indices ended with losses while all other indices able to close in positive territory.

Though the market bounced from the support 10585 level, the follow-up buying interest was not evident in the next two days. On Friday, Nifty traded just 43-point range with very low volume and unable to cross the preceding day high. Moreover, it was incapable to close above 20, 50, 200DMAs. Nifty closed with just 38.2 per cent rebound from the prior downswing.

The pullback faced resistance at 50-week moving average. As Nifty was unsuccessful in closing above the even shorter-term moving averages and trading in well-defined congestion zone over past 16 weeks, the leading indicator remained in the neutral zone, below the 50. Next week is very critical for the market, to make a decisive move.

If it moves above the 10790 and continues for at least two days, there are chances of Nifty reaching 10960 level.  In any case, if it continues below 10790, the next level of supports are placed at 10690 followed by 10640. Failure to reach or sustain above the said area could turn Bulls nervous and keep the Bears in play. So, another lower low and close below Wednesday’s low would re-confirm the bearish bias.

Currently the MACD, another momentum indicator also below the zero line and the signal line. The MACD moved below its signal line seven sessions ago. Another momentum oscillator, Stochastics’% K already entered the overbought zone, indicating that upside is limited for a shorter period.  

The Directional Movement Index is also suggesting that the strength of the past three days' positive movement is lacklustre as -DI is dominating +DI and ADX.  For next week the range shifted to 10960-10585.

Either side breakout will lead to a massive move in a faster manner.  The Bank Nifty and Financial services indices are gradually moving up. It is better for investors to follow strict stop loss and concentrate on risk management while trading. (The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)