Guest column: Market oversold, bounceback likely soon

By Jimeet Modi

The market fell relentlessly last week with no bottom in sight. Nifty briefly touched 8,000 and started the downward spiral thereafter as the bear hug continued.

The biggest home-grown worry that market reacted to was a stagnation in core sector growth at 1.1 per cent in July. Also, the government think-tank talked about a deflationary trend going forward.

The market was running high on bearish sentiments, which suffocated the primary market, taking a toll on Prabhat Dairy, which had to extend the closing date of the issue.

FIIs bought Nifty puts to the tune of Rs 11,500 crore during the week, the highest so far this year. Such high bearish sentiment also led to an occasional sharp bounceback. The passenger car segment is enjoying the ride on bear market in crude oil with monthly sales growing at 6 per cent to 7 per cent backed by new launches.

Talks of deflation and multi-year-low commodities prices and low inflation are typically precursors to RBI reducing interest rates in the September review.

Technical Outlook:

Nifty had broken its key support at 8,000 the week before. Last week, it briefly tested the 8,040 level and then started the downward trend and reached 7,629.75, the lowest point of the week.

The fall was not as severe as we had seen in the previous weeks, but sentiments are highly bearish and this excessive pessimism makes a case for a sharp pullback in the coming weeks.

The 8,000 level on Nifty, which was earlier a support for many weeks, will be a key resistance in the coming weeks. The medium-term trend has turned downward, with the break of key levels. However, the short-term oscillators are showing tremendous oversold readings, which can lead to a sharp bounceback, helping Nifty to retest its key resistance area of 8,000.

From a trading perspective, it would be better to avoid long trades and utilise any weakness at higher levels to initiate shorts. From a long-term perspective, the market is still in its corrective phase, which may last longer than expected, before the upward journey resumes.

Expectations for the coming week:

The volatility in stocks, currencies and commodities markets is expected to reduce and some amount of stability should return during the week. Bearish sentiments are running high and, therefore, a bounceback is expected this week.

The pharma and IT sectors are likely to remain resilient on the back of a weak rupee. All attentions will now start shifting from China to the US to take the cues on Fed rate hike. Speculation on the outcome of the Bihar polls will also influence the market. While the broader market is expected to remain volatile, the undercurrent has turned bearish in the medium term. Nifty is likely to oscillate at current levels till September 16-17 when the outcome of the US FOMC will be known.

Nifty ended the week 4.3% down to close at 7,655.05.

(The author is CEO, SAMCO Securities. Views and recommendations given in this writeup are his own and do not represent those of EconomicTimes.com. Please consult your financial adviser before taking any position.)