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How long can the markets consolidate or stay in range?

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How long can the markets consolidate, or stay in a range?. This is one question which lingers on to the minds of all investors and traders in the current scenario.

Last week’s price action can be termed as a mixed reaction for our markets. The first three trading sessions of the week seem to suggested lacklustre movements in our markets. However the last two sessions were the game-changer. The reason we believe that is because, on Thursday the markets ended lower breaking the key support of 5550 and the sentiment at the end of Thursday was heavily bearish, however on Friday it was a complete turnaround for our markets. Nifty broke the key levels of 5600 and was in touching distance of breaking the 5650 mark at one point of time. We believe that such swift turnarounds in markets, especially with the kind of lacklustre weeks of trading, is good, as now any further positive momentum can result in more short covering coming across a lot of stocks.

There are two critical aspects technically, which is worth noting in the last 2-3 weeks of price action:

1. The rally in the second half of June from 5250 to 5750 levels. The retracement levels of 50% was exactly at 5495 (which apparently was the low on 12th July). The markets have thereafter not looked back at the support and have held on to it.

2. The next key aspect is the confluence of short term moving averages around the 5500-5550 mark. The zone was very critical from the technical point of view and a sustained close below this range could have triggered a next round of selling in the major indices.

Next week is an action packed week for our markets, as there is the RBI policy meet and also the expiry week for July contracts. We believe that the action would be more on the bullish side, as the global indices (especially Dow) look quite attractive on charts. Also we believe that the frontline stocks, which had a subdued last couple of weeks, will once again witness some strong price action. Short covering will also be witnessed in many of the oversold counters once the markets stable above 5650 levels.

Food for Thought: Since 2003 our markets have always had a positive close, with an average gain of 4.8% and a minimum gain of 0.5%.

Written by Kunal Bothra

July 28, 2011 at 1:35 pm