Here’s why you should keep your eyes glued to the Nifty this week

Publish Date: October 09, 2018

This week will be a litmus test for stock markets, especially Nifty 50.

The markets will be in better shape if the National Stock Exchange’s benchmark index — Nifty — manages to go beyond 10,800 points in the next few days.

But if it doesn’t, the Nifty could very well tumble to 9,100 points. That’s because the index could form lower tops and lower bottom patterns, both of which invoke negative sentiments in the market.

Two reasons why Nifty could bleed

For starters, it’s never good news if the 200 DMA (daily moving average) is broken at any point of time. Breaking the 200 DMA can lead to the stock market shedding 10%-20%. At the mo-ment, the Nifty is dangerously close to breaking the 200 DMA negatively. (You can read 4 tech-nical indicators to follow to learn more about DMA)

Though, it must be noted that the Nifty can withstand the pressure for a few days. In March 2018, the Nifty had actually broken the 200 DMA for five days, but it managed to bounce back then. In fact, it recovered more than 1,000 points. However, such situations are not the norm.

The other cause for worry is that Nifty has already broken the 50 WMA (weighted moving aver-age) placed at 10,708. (WMA is another tool used to forecast how the market will fare)

If the index remains below the 50 WMA for a couple of weeks, it could adversely impact the 200 WMA.

The 200 WMA is important because it helps identify the long-term movement of the stock mar-ket. It is supposed to be the dividing line between bull and bear market.

Related read: What are Bulls and Bears

This kind of fall from 50 WMA to 200 WMA has already been proven in case of NSE Mid Cap and BSE Small Cap Index. The gap between 50 WMA and 200 WMA of NSE Mid Cap Index was 19% — a chasm that is about to be filled. Similarly, the gap between BSE Small Cap 50 WMA and 200 WMA was 21%. That distance has almost been bridged now.

It seems the market has gone into an oversold zone a little too quickly. That’s because the Nifty still has strong support at 10,000. The index can recover from sub-10,000 points due to a fairly strong 200 WMA. (The 200 WMA is currently supporting the NSE Mid Cap and BSE Small Cap index)

However, no-one should be complacent right now, thinking it could support the indices perma-nently.

Strategy to deal with current market uncertainties

The current tumult in the markets leads to two questions: what should be the strategy now and where will the market go from here?

Related read: What is troubling India’s financial markets

There is no one answer to this. We’ll have to look at different scenarios to understand what strat-egies can be adopted.

So, let’s have a look at two different scenarios:

If Nifty is above 10,800

As we mentioned earlier, if Nifty is above this mark in the coming week, you can heave a sigh of relief, at least for now. In such a scenario, you can hold on to good-quality stocks and purge the weaker ones.

It’s important to drop the weaker stocks because the Nifty doesn’t seem to have the legs to go and form a new high this time. You can blame the current weakness in the market on soaring crude oil prices, rising US bond yields and currency depreciation.

As a result, the earnings estimate will come down after the second quarter of FY2019, which will prompt an increase in forward price-to-earnings multiple.

From the future and options (F&O) perspective, one can look to buy Nifty calls of 10,100 or 10,200. This would suit those who are looking to capture a potential 500-700 points move up from 10,000 levels.

However, one needs to be very vigilant closer to the 200 DMA and be smart enough to reverse the position. It is better to buy puts of 10,500/10,600 if Nifty is not able to cross the 200 DMA de-cisively.

Related read: How you can hedge your portfolio

In short, the memo is clear: you need to track the Nifty closely this week (and hope the NSE in-dex is above 10,800 at the end of the week).

This is the first article of a four-part series that focuses on how the markets will fare in the next few months.

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• How domino effect works in markets
• Our brokerage options
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