One should exit longs and those with a desire for high risks can create some short positions with an appropriate stop loss as the risk/reward ratio is now favouring a drop

S&P Nifty close: 5,320.40
Market Trend

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

As expected, the bulls fought back in style and the Nifty made a recent new high. The market opened with an upside gap on the first day of the week and since then has moved steadily higher, before easing off a bit at mid-week. The Nifty finally closed 105 points (+2.01%) in the green. The volumes were, however, marginally higher than last week implying that the bulls would feel slightly more confident of this rise.

The sectoral indices which outperformed were CNX Auto (+4.01%), CNX IT (+3.65%), CNX MNC (+3.27%) and CNX Metal (+3.04%) while the underperformers were CNX PSU Bank (-4.72%), CNX Infra (-0.68%) and CNX Realty (-0.37%). The histogram MACD has moved up in line with the rise in the Nifty and as long as it remains above the median level the bulls are in control.

Here are some key levels to watch out for this week

• As long as the S&P Nifty stays above 5,319 points (pivot) the bulls can breathe a bit easy though it is overbought in the short-term and is barely above this level now.

• Support levels in declines are pegged at 5,261 and 5,202 points.

• Resistance levels on the upside are pegged at 5,378 and 5,436 points.

Some Observations

1. The Nifty recovered as expected and has made a recent new high and we anticipate that a reversal is likely from these levels.
2. The ‘gap’ area between 5,246 and 5,260 has be defended by the bulls at all cost or else they would find the going tough.
3. We saw the Nifty hit the resistance line (in black) from where it pulled back a wee bit.
4. We are now heading into the 34^th (Fibonacci number) week from the low of 4,531 points (23 Dec 2011) hence could be a significant top.

Strategy

The Nifty did make a recent new high but did not correct as was expected during this week. It hit the trendline resistance (in black) from where it eased a tad. We are now into the 34^th week from the low of 4,531 points (23 Dec 2011), hence we have been advocating exiting long positions into the rise last week. We came very close to hitting the 61.8% retracement (5,301 points) of the decline from 5,629-4,770 points. Looking at the above-mentioned factors we would reiterate exiting longs and those with a penchant for high risks can create some short positions with an appropriate stop loss as the risk/reward ratio is now favouring a drop. This is a contrarian view as there is bullishness all round, hence the possibility of a bear trap!!

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