Weekly Market Recap
After two weeks of solid rebound, the NIFTY took a pause and shed a few points, but well managed to stay above the blue horizontal support line (see the chart below) which I have been writing on for the past few weeks. As I also mentioned last week, it could be a decent entry point if NIFTY corrects to that support level with less volume and it looks like the market has followed the same path.
In the week gone by the benchmark, SENSEX shed 501 points, or .87% to close at 57362. Similarly, NIFTY was down by 124 points, or .78% to settle at 17153. While BANKNIFTY once again led the decline and fell over 2.5%.
Current Outlook
Over the past 2 weeks, the upside momentum which has gathered its pace seems to have dissipated to some extent, however, until NIFTY stays above the reclaimed support level, we can say it has resumed its uptrend. At this juncture, there is an ambiguity, on below daily chart it is too early to say that a fresh leg of the rally will take place as financials are quite stressed. However, the long-term weekly and monthly chart which I haven’t enunciated yet, is pointing to a cyclical bear market. Though I may be wrong, what I can see is the given configuration indicates that risk levels are more elevated than they were before which means we should take a more defensive stance.
Two reliable indications of weakness come from a slowdown in financial stocks and a jump in inflation. The fear of rising inflation is in talks for a few weeks and is likely to grow more so, as the recent re-acceleration of food and energy prices feeds back into consumer spending patterns. History says when the CPI reaches a point where spending patterns are disrupted the stock market reacts negatively as inflation-adjusted returns suffer significantly. In my analysis, I have found that this relationship can be traced all the way back to the 1990s, with similar results.
Hence, given the ambiguity, the question naturally arises as to its current direction. The simple answer is that it’s too early to tell. Until proven otherwise, the benefit of the doubt should be given to the positivity secured on the daily chart. At this point, what we can do is keep analyzing the movement gravely, sooner or later market itself will point to the impending direction or help us in identifying the secular reversals.
Conclusion
Given the ambiguity, it is prudent to stay cautious, even though on a daily chart there is the probability of a retracement rally. However, one characteristic I found common in recent correction is that the sharp reversal is taking place after the bullish configuration that is quite pernicious in nature. Hence, be patient.
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Be Patient; Be a Savvy Investor..!!
Pankaj