Weekly Market Recap
As expected, the bull run in stocks continued to carry on this week, though we saw a sharp knee-jerk reaction on the weekly expiry day on Thursday, however, NIFTY managed to recover and closed near the high point of the week. Growth stocks, in particular, technology and banking continued their run with the support from discretionary stocks.
In the week gone by the benchmark, SENSEX gained 817 points or 1.42% to 58387, similarly, NIFTY added 239 points, or 1.39% to settle at 17397.
Current Outlook
Until early this week, the overall configuration along with technical indicators was well suited for the bulls. By the end of this week, the bulls look hobbled, and upside momentum seems to have deteriorated. Though it is quite common for the NIFTY to have a minor pullback or standoffish move after having a lopsided rally of over 1500 points. As I wrote a few weeks back, based on the then technical setup it is quite likely that NIFTY may reach the top of the channel before turning again, and now NIFTY is very close to that range.
NIFTY reaching at the top of the range doesn’t mean it will certainly turn around, it is quite possible after having some consolidation it may break above the channel and continue to rise, however, it is of utmost importance to consider a few points before we invigorate the super bullish stance from hereon. Foremost, NIFTY has demonstrated a similar pattern in the recent past as enunciated by the green vertical line on the chart below both moves were ostentatiously bullish and failed suddenly precisely at the top end of the channel. The corrections were as sharp as the steep rises were, coincidently both the times the pullback brought down the NIFTY to the lower end or in fact below the channel.
Moreover, the VIX is also enunciating the same picture as we saw during the previous two peaks. While the VIX is often termed the “fear gauge” because of its inverse relationship to stocks, it’s really more of a measure of volatility — implied volatility, currently the VIX has alleviated significantly, but also in a clearly defined range. The VIX is now at the lower end of that range, which is right where volatility was sitting when we reached the April and January market peaks.
Conclusion
The market needs to resolve the given condition in order to negate this bearish categorization, and support more of a bullish case in the coming weeks. Foremost, the “change of character” where the VIX should remain relatively low as the NIFTY climb above the channel. Unless I find any veritable evidence in the support of the bulls, I think the current rally is at the exhaustion point. Hence, caution is warranted.
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Be Patient; Be a Savvy Investor..!!
Pankaj