Weekly Outlook of Nifty from 30th July - 3rd Aug

NIFTY is unable to retain its momentum that triggered the 5095-5348 rally and since then posting lower highs at 5257/5238. Sensex had a lower weekly close for the third straight week. The 20 week EMA failed to cross above the 50 week EMA and the index is trading below. A test of support from the trend line at 16366 seems pending. A drop below the trend line will give bears total control. An upward bounce with volume support will give bulls some hope.

There is comfort that worst is behind in the domestic sector with the Government set to act soon. This will be followed by RBI’s growth supportive and favourable monetary environment. The cues from external sector are not negative at this stage. Global investors are back into “risk-on” mode and expected to stay invested into Q4 of 2012. There will be good appetite for Indian stocks from FIIs. Taking all these together, downside risk seem to be limited. The market has already priced-in concrete actions from the Government and RBI’s pause mode on 31^st July.

Weekly technical indicators are turning bearish. The MACD is barely above its signal line, and about to drop into negative territory. The ROC is above its 10 week MA, but has started to move down. The RSI is still below its 50% level. The Slow stochastic has slipped down from its overbought zone. Sensex is still in a bear market, and likely to look for lower levels.

Rate cut hopes are fading. FDI is slowing down and so are exports. Rupee is depreciating against the US Dollar. Inflation is still not reasonable. Well-known companies are being investigated for fraud and tax evasion. Everything is going negative.

The daily chart pattern of Nifty is trading below all three EMAs, which have moved very close to each other. A sharp move usually follows. The only way for the move to be upwards is if FIIs start buying in huge volumes. It is Possible but seems unlikely. So, prepare yourself for a sharp down move at any time.

Technical indicators are bearish. The MACD is falling below its signal line, and entered negative territory. The ROC is negative, but has moved up to touch its falling 10 day MA. The RSI has come out from its oversold zone. The Slow stochastic is inside its oversold zone.

Conclusion: Chart patterns of Sensex and Nifty are falling back into bear markets, after brief rally into bull territory. The expectation into the near term is for build-up of strong base at 5100-5000. If the Government delivers to expectations, a smart rally into 5350 will be witnessed and delivery beyond expectations will get the focus at 5600. It is important that the Government avoid sending disappointing signals which would generate sell-off below 5100 into 4815/4770. For now, let us watch 5100-5350 and would prefer bullish extension into 5600 in due course. The strategy is to stay invested with stop below 5011 for 5350/5600. It seems the time hasn’t developed for bottom fishing. Stick to regular investments in quality stocks. If in doubt, stay out and preserve cash.