The weekly averages continue to be negatively phased despite the sharp rise indicating that one should exit long positions at current levels as well as any further rise

S&P Nifty close: 5,278
 

As we had envisaged last week, 25th and 29th June turned out to be extremely volatile days. The Nifty crossed the 5,190-point mark which saw the shorts getting squeezed as the Nifty gained for the fourth week in a row from the lows made during the week ended 8 June 2012. The benchmark finally ended a smart 132 points (+2.58%) in the green in a week of volatile trade. Volumes were however marginally higher than last week implying that the rise is of corrective nature even though it has survived for four weeks (we had mentioned 5-6 weeks) now.

The sectoral indices which outperformed were CNX Media (+6.06%), CNX Metal (+4.15%), CNX Commodities (+3.65%), CNX Finance (+3.07%), CNX Energy (+3.06%), CNX PSE (+2.93%) and CNX Infra (+2.92%) while the gross underperformers were CNX Auto (+1.16%) and CNX PSU Bank (+1.16%). The histogram MACD has moved marginally above the median line but the short term oscillators are overbought. This implies that the possibility of a higher bottom in the ensuing decline has increased.

Here are some key levels to watch out for this week

■ As long as the S&P Nifty stays above 5,220 points (pivot) the bulls need not worry. They should use this as a stop loss on longs.

■ Support levels in declines are pegged at 5,154 and 5,029 points.

■ Resistance levels on the upside are pegged at 5,344 and 5,411 points.

Some Observations

1. The Nifty has completed the targets of 5,098 (38.2%) and 5,200 (50%) and has come very close to 5,301 (61.8%) points retracement of the decline from 5,629-4,770 points.

2. Surprisingly it crossed the 5,260 points with consummate ease which creates the possibility that the ensuing decline might make a higher bottom above the recent low of 4,770 points.

3. We have completed 18 weeks from the recent high of 5,629 points.

Strategy

The weekly averages continue to be negatively phased despite the sharp rise indicating that one should exit long positions at current levels as well as any further rise. The short term oscillators are also overbought and the rally is now four weeks old (the time frame we were expecting since the low was 5-6 weeks). The volumes have also not been very encouraging in the rise as the Nifty has almost hit the 61.8% retracement level of the decline from 5,629-4,770 points. The resistance line (in black) is pegged just above the 5,400 points mark (a remote possibility of hitting that level) in the current rise. From the decline of 6,338 points (November 2010) the tops have been on an average 16-18 weeks apart and we have now completed 18 weeks from the top of 5,629 points. Looking at all the above it would be prudent to book profits at current levels as well as in any further rise. Those enterprising (high risk players) can even build shorts with an appropriate stop loss (depending on the selling price) as there is a possibility that we might begin a decline which goes sub 5k if not more, in the weeks ahead.

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