A breather after the slide as the bulls will try to fight back

Vidur Pendharkar 28 July 2012

Volatile move ahead unless the support of 4,967or resistance of 5,230 is broken for the direction to reverse

S&P Nifty close: 5,099.85

Market Trend

Short Term: Down Medium Term: Down Long Term: Down

After a gap down open the Nifty collapsed, as was envisaged in the last piece, to a low of 5,032 points on the last day of the July F&O contract expiry. The market opened with an upside gap on the first day of the new settlement (Friday) on the ECB announcement of defending the euro but it gave up a sizeable portion of the gains at close. The Nifty finally closed 106 points (-2.02%) in the red. The volumes were also significantly higher than last week implying that there was some panic bull liquidation.

The sectoral indices which outperformed were CNX FMCG (+1.07%), CNX Pharma (+0.43%) and CNX MNC (+0.33%) while the gross underperformers were CNX PSU Bank (-9.70%), CNX Realty (-7.38%), CNX Infra (-4.81%), CNX Metal (-4.45%) and CNX Auto (-3.18%). The histogram MACD has moved lower but is still above the median line. One has to watch this closely because if it drops below the median line the bulls will then be under tremendous pressure.

Here are some key levels to watch out for this week

• As long as the S&P Nifty stays above 5,098 points (pivot) the bulls can breathe a bit easy though the short-term trend is down.

• Support levels in declines are pegged at 5,033 and 4,967 points.

• Resistance levels on the upside are pegged at 5,165 and 5,230 points.

Some Observations

1. As expected, the Nifty cracked from around the 20th of the month and is now trying to recover some lost ground.

2. The “gap area” between 5,164 and 5,169 will be the immediate hurdle for the bulls to watch out for.

3. 5,153, 5,190 and 5,227 are the Fibo retracement levels of the recent sharp fall from 5,348-5,032. These should act as resistance in rallies.

4. We saw the Nifty complete the 50% retracement (5,059) of the rise from 4,770-5,348 points while the 61.8% retracement level is pegged at 4,991 points.

Strategy

The bulls will try to regain lost ground but they will face their first test in the 5,153-5,169 area. If they are able to survive above this range for a few days then they can look forward to pushing the market higher towards the Fibo resistance levels mentioned above. However, the strategy should of selling when the markets approach these levels as the short-term trend is down. Some volatility can be expected in the next week and if the market is somewhere close to the support/resistance levels mentioned above, then expect the direction to reverse.

(Vidur Pendharkar works as a consultant technical analyst & chief strategist at www.trend4casting.com.)

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