A significant top is expected where one should at least exit longs

Vidur Pendharkar 04 August 2012

It would be prudent to exit long positions in any further rise and those with a penchant for high risk can initiate shorts close to the resistance levels with appropriate stop loss in place

S&P Nifty close: 5,215.70

Market Trend

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

As expected the bulls fought back in style after the drubbing of the past three weeks. The market opened with an upside gap on the first day of the week and since then has moved steadily higher barring a small hiccup at the open on the last day of the week. The Nifty finally closed 116 points (+2.27%) in the green. The volumes were, however, significantly lower than last week implying doubts as to the sustainability of this rise.

All the sectoral indices ended in the green. The sectoral indices which outperformed were CNX Realty (+4.66%), CNX Pharma (+4.15%), CNX Infra (+3.39%) and CNX Energy (+3.01%) while the underperformers were CNX Metal (+0.23%), CNX Auto (+1.17%) and CNX Consumption (+1.60%). The histogram MACD remained above the median line. One has to watch this closely because when it drops below the median line the bulls will be under tremendous pressure.

Here are some key levels to watch out for:
• As long as the S&P Nifty stays above 5,197 points (pivot) the bulls can breathe a bit easily though it is overbought in the short-term.

• Support levels in declines are pegged at 5,148 and 5,080 points.

• Resistance levels on the upside are pegged at 5,265 and 5,314 points.

Some Observations

1. The Nifty recovered as expected and has closed near the high of last week from where we were expecting it to reverse.

2. 5,165 was the 38.2% Fibonacci retracement level of the recent rise from 5,032-5,246 which was hit during the intraday correction on Friday.

3. Immediate resistance is expected from the trendline (in green) pegged around 5,296 points.

4. If it clears the above hurdle and sustains above it then it could try to test the trendline resistance (in black) pegged around 5,380 points, next week.

Strategy

We saw high volatility during the week as was envisaged last week and now have to see whether it reverses direction next week. From a positional trading perspective one should exit longs in any further rise from here on especially close to the resistance levels (trendline and R2 level) mentioned above. We have completed the 89th week (Fibonacci number excl. the top) from the top of 6,335 points (12th Nov 2010). The current rise is also slower (in time on the weekly charts) as compared to the previous rise from 4,531-5,629 points. Looking at these factors there seems to be a very high probability of the market making a top next week which could last for a few weeks at the least. Therefore it would be prudent to exit long positions in any further rise and those with a penchant for high risk can initiate shorts close to the resistance levels mentioned above with appropriate stop loss in place.

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

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