Short covering may prompt recovery

Prices likely to recover till Nifty 5750 ahead of settlement.

Four negative sessions were followed by a partial recovery on Friday but week-on-week, the market lost considerable ground. The Nifty ended down 5.05 per cent at 5608 points after hitting an intra-day low of 5394 on Thursday.

The Sensex was down 4.29 per cent. The Defty lost 5.75 per cent as the rupee softened somewhat. The FIIs were massive sellers while the Indian mutual funds were almost neutral. Breadth was negative on week-on-week basis but it was positive on Friday.

The broad BSE 500 was down 4.06 per cent while the CNX Midcap lost 4.07 per cent. The Nifty Junior was the best performing index with a loss of only 1.55 per cent. Volumes were low through the week and lowest on Friday during the recovery.

Outlook: The market is most likely to swing through the range of Nifty 5350-5750 through settlement week. Monday is quite likely to be uptrending but there is powerful resistance starting at 5675. Intra-day volatility is likely to be in the 250-300 Nifty range.

Rationale: Friday’s upmove was driven by short-covering in both cash and derivatives. This week is likely to see profit-booking by the “shorts” in the F&O segment. That could push prices up but there seems insufficient volume to cause a full-fledged recovery.

The market has performed a double (actually multiple) top, which is bearish. On the downside, support at 5400 seems strong. If that breaks, the next reliable support is 5200.

Counter-view: If FII attitude changes to positive or volumes jump beyond expected levels with the short-covering, the market could swing beyond 5750 and all the way to 5950. This doesn’t seem likely but it could happen.

Bulls & bears: Quite a few stocks made strong recoveries on Friday but most of the price gains were obviously due to short covering. The IT sector saw some hope in the rupee correction and Infosys and Tech Mahindra were among the best performers. Among other stocks, Tata Tele and Bajaj Auto looked genuinely promising