Moneycontrol Pro Market Outlook | War clouds over the Middle East can keep the market jittery

Data indicates a short-term top 

The Nifty index concluded the week with no significant change, forming a shooting star candlestick pattern on the weekly chart. The previous week's peak of 22775 now emerges as a pivotal resistance level in the short term. Examining lower timeframes, the breach of certain key levels suggests a potential correction in the upcoming trading periods.

On the way down, the 40-day exponential average at 22200 and the 61.8 percent retracement level of the recent rise from 21710 to 22775 at 22112 are the important downside levels to watch out for. A decisively close below 22112 can reverse the medium-term bullish trend.

This week, the Client's net index position went to -16,088 contracts (see chart Client position) on 10th April. If we go by the historical data, then when the Client's net index position reaches between -10,000 contracts and -40,000 contracts, a short-term top occurs. Also, technically, the Nifty index hit its resistance zone this week and corrected from there. A short-term top is possibly in place if the Nifty index does not break and sustain above 22775 in the forthcoming trading sessions.

Client position

Source: web.strike.money
A look at the broader market (see chart Nifty Total Market index), which consists of 750 stocks, shows that most stocks are overbought. The reading of the percentage of stocks above 20DMA for this index is 84, and it's still in the overbought zone.

Normally, when we have such a high reading, we either see a divergence between breadth and the benchmark index where the index rises higher but the green line (percentage of stocks above 20 DMA) declines, indicating fewer stocks participating in the rally or we see a correction in the index and breadth both at the same time.

To know which scenario will unfold, it is important to track the 40-day exponential average, currently at 22200. Closing below the 40-day exponential average will not only weaken the breadth but can also lead to a meaningful price-wise correction in the index. If the 40-day exponential average holds, then breadth and index divergence are likely.

Nifty Total Market index

Source: web.strike.money
The FIIs' position in the index futures (see chart FII futures position) has seen a massive turnaround this week from -23,636 contracts to +33448 contracts. The wild movement in the FIIs' position in the index futures suggests that they were forced to cut short positions as the Nifty index scaled new highs, and they eventually created large long positions around the highs.

Though FIIs added to their futures-long position, they were sellers in the cash market for Rs 6,526.71 crore during the week.

If the 40-day exponential average holds and the Nifty index breaks above the recent high, then we may see FIIs' long position surge to 60,000 – 90,000 contracts, resulting in positive momentum in the short term. On the flip side, if the 40-day exponential average gets taken out decisively on a closing basis, then a deeper correction is possible, resulting in the unwinding of the long positions. It would be interesting to see how it goes in the forthcoming trading sessions.

FII futures position

Source: web.strike.money Indices and Market Breadth

Even as Indian markets touched a new high during the week, a fall in the US market on account of rising bond yields due to higher-than-expected inflation pushed the market lower. Adding to that, growing war clouds in the Middle East and rising oil prices saw traders exiting their positions and pushing the market lower.

In addition to a flat closing by benchmark indices, the broader market saw profit booking after touching new highs and closing on a flat note.

However, the Metal index posted a three percent gain, while the Real Estate index added 1.5 percent, and the Auto index closed one percent higher. Among the weaker sectors were Nifty Pharma, which fell by two percent, and PSU Banks and Media stocks, which fell by 1.5 percent.

Among the top-performing stocks were Ramco Systems, which gained 35.68 percent; Puravankara, up 33.68 percent; and Abans Holdings, which jumped 26.35 percent. Among the losers were Reliance Infrastructure, which dropped 33.82 percent; Reliance Power, which lost 15.87 percent; and Shiva Cement, which fell 12.53 percent.

Global Market 

US stocks saw a sharp fall on Friday on worries over the escalation in the Middle East. All three US indices closed the week in the negative. The start of the earning season on a poor note also added pressure. JP Morgan Chase, which gave lower-than-expected guidance, led the fall.

Adding to the fall was higher-than-expected CPI inflation data, which saw the 10-year US Treasury close above the psychological 4.50 percent mark at 4.532 percent. The probability of a rate cut in June is down to 20 percent from 65 percent two weeks ago.

MSCI World market also fell by 1.51 percent.

The weak US market sentiment, and rising yields crossed the Atlantic, caused a fall in the European stock market. Euro Stoxx 50 closed 1.21 percent lower, with most markets closing in the red beside the FTSE. The UK benefited from a rising GDP for the second straight month.

The Japanese market was the strongest among developed markets, closing 1.47 percent higher the week, while Chinese markets were the weakest, closing 1.62 percent lower.

Stocks to watch

Though markets are expected to be weak, some stocks showing strength that can be kept on the radar are ICICI Bank, DMart, Bharti Airtel, M&M, Muthoot Finance, VGaurd, SRF, and Canara Bank.

Among the weaker stocks are IdeaForge, Asian Paints, Bata India, Manyavar, Dabur, and HUL.

Cheers, Shishir Asthana