The Nifty has completed key targets hence book profits in any further rise

Vidur Pendharkar 21 January 2012

Investors are advised to be cautious for creating fresh longs and on the contrary advice to book profits in any rise from here on as the market is expected to become volatile and a decline is likely early into the new F&O settlement

S&P Nifty close: 5048.60

Market Trend
Short Term Up Medium Term Down Long Term Down

The Nifty opened flat and after a one-day pause and rallied smartly to hit the R2 level of the week of 5,023 points as well as almost completed the 61.8% retracement of the decline from 5,399-4,531 points, pegged at 5,068 points. Thus the Nifty rose for the third consecutive week notching a handsome gain of 182 points (+3.75%). Volumes during the rise were almost equivalent to the previous week. The sectoral indices which outperformed were BSE Reality (+7.97%), BSE Oil & Gas (+6.43%), BSE Bankex (+5.94%), BSE Capital Goods (+5.49%) and BSE Auto (+4.17%) while the gross underperformers were BSE FCMG (-0.19%), BSE IT (+0.32%) and BSE Healthcare (+0.67%).

The weekly histogram MACD has moved above the median line implying that the short-term trend has turned up even though the intermediate term trend remains down. The recovery continued on good volumes indicating strength. Those who created fresh longs in dips, as advised, should be cautious in any further advance from current levels as the risk/reward ratio is now becoming even. Therefore, one should look out for booking profits in further rallies as a decline is expected during the end of this calendar month. Alternatively one should raise his stop loss on positional longs to 4,979 points (for this week) and from a trading perspective to 5,004 points for Monday.

Here are some key levels to watch out for this week

As long as the S&P Nifty stays above 4,979 points (pivot) the bulls can breathe easy and the onus is on the bears to pull things back.
Support levels in declines are pegged at 4,895 and 4,742 points.
Resistance levels on the upside are pegged at 5,133 and 5,217 points.

Some Observations
1.   The bulls have succeeded in driving prices higher which have now we have reached the minimum target area between 5,023-5,070 points (Fibonacci target if one takes into cosideration the rise from 4,531 to 4,800 and the subsequent higher bottom of 4,588 points)
2.   This corrective rise has now come very close to 5,068 points (61.8% retracement levels of the fall from 5,399-4,531 points) hence one should be cautious in rallies from here on.
3.   A significant short-term top is already in place or is likely this week and one should book profits around the 24th-27th January 2012 from where we are expecting a sudden bout of selling to take place.

Strategy
After a brief one-day pause, the Nifty rallied smartly but covered slightly more ground than was anticipated for this week. However, it has fitted perfectly into the picture we had visualized of the market going strong into the Futures and Options (F&O) settlement expiry due this week. We advocate caution for creating fresh longs and on the contrary advice to book profits in any rise from here on as the market is expected to become volatile and a decline is likely early into the new F&O settlement.

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

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