Weekly Outlook of Nifty from Jan 7th - Jan 11th

The first trading week of the year 2013 showed enhanced buying. The US Fiscal Cliff and RBI monetary policy hopes are driving the sentiments. However the DIIS net selling has prevented a runaway rally by the Sensex.

The weekly chart of the Sensex shows that the rally within the upward-sloping channel  has a combination of consolidation and correction which has maintained the technical health of the rally. However, Sensex is likely to face resistance from the top of 19800 and the upper edge of the upward-sloping channel at around 19900. Some consolidation or correction is quite likely prior to Q3 results that will start hitting the market in coming days.

It is important to note that the ROC, RSI, and Slow stochastic touched lower tops while Sensex touched its highest level and this negative divergence can be a warning of an approaching consolidation/correction.

Nifty has given a break out above its resistance zone and the psychological 6000 level. However, volumes during the break out were not significantly higher but neither low by any means.

Nevertheless the top edge of the upward-sloping channel, within which Nifty has been trading for more than a year, is still 200 points away. That opens up the possibility of a further rise in the index before a meaningful correction.

Daily technical indicators are looking bullish, but have touched lower tops while Nifty has reached 2 years high. The combined negative divergences seen on MFI and other indicators are hinting that smart money is flowing out of the market on every rise and this can lead to a consolidation or correction.

Conclusion: FIIs remain the sole contributors to the outstanding performance of NIFTY in 2012 and have stayed invested from December 2011 low of 4531 and June 2012 low of 4770. The risk-reward is not in favour for FIIs to stay invested from now on, hence there may be set up of correction process in near to short term. On the other hand, domestic cues are looking good in 2013 to attract domestic investors which suggest mixed signals.

Sensex and Nifty have rallied from their Jun ‘12 lows, and seems ready for some consolidation or correction. In near term expect NIFTY index to face strong resistance at 6181 level. However huge profit booking can be expected once Index touches 6181 level. Derivatives data suggest that 6200 is restricted for this F&O series as the highest open interest is at 6200 strike Call options. Upcoming Q3 results should be checked before jumping in to buy. However, one can keep accumulating fundamentally strong stocks trading at reasonable valuations regardless of index levels. For the week, one can watch consolidation at 5979-6065. The maximum reward will be for extended gains into 6107/6181 while downside risks can extend below 5880 into 5820.