Nifty Is Overbought, But Bullish

  • 8 months ago
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Market during the week witnessed many gap-up openings indicating exuberance in the overall sentiment. Small and midcap indices led the market optimism making the rally more broad-based which was aided by huge FPI inflows. For the month of August, FPI equity inflows have reached their highest levels of nearly USD 6 billion which happens to be the highest monthly number in history. However, it would be pertinent to note that all inflows are not through secondary markets, a major part has come in through FPOs and QIPs. On the contrary, DIIs have remained bearish and have continuously pressed the sell button in August.

In the midst of the optimism on D-Street, corporates are on a capital raising spree which is causing a lot of liquidity to be sucked out from the system. US Fed’s policy intention to keep interest rates at rock-bottom and keep system afflux with liquidity for an extended period of time even if the inflationary pressure kicks in is a bullish signal for all asset classes. This happens to be an important indication to the world that a great deal of liquidity for longer periods of time will inflate all asset classes including , metals, and of course equities. Only after January 2021 when new US President comes into power, there can be alterations to this stance, till then financial markets will be awash with liquidity which eventually has the potential to fuel the rally even higher.
However, India is tied with its own issues for the past few weeks. RBI has begun a special operation twist in order to cool down the yield in the bond market which was inching higher on the back of inflationary tendencies in the economy. Inflation, therefore, seems to be a reality going ahead which will at least cap further reduction in interest rates in India and hopefully across the world. Going ahead this pandemic will bring a bigger challenge for central banks across the world on how to juggle inflation and interest rates.
In order to keep the ball rolling towards making India ‘Atmanirbhar Bharat’, the Government permitted upto 74% FDI in the defense manufacturing sector through the automatic route, in order to promote indigenous manufacturing and development of defense weapons. Although the intention of the bureaucrats was there on paper for a long time it made progress only this week, which will open a window of big opportunities for corporates to enter into the defense manufacturing space. These government decisions towards defense may turn out to be a Y2K like opportunity similar to the IT boom back in 2000.
Nifty50 index formed a big bullish candle after witnessing strong participation from the banking space which closed with gains of almost 10 percent. The rally in the banking index has charged the bulls enough and has led Nifty50 to surpass the brief resistance at 11530. The index now might be heading up to the zone of 11850, but still, is overbought and is trading at the upper end of the channel/resistance drawn by connecting April and July highs. So, traders need to be careful about this as the potential upside might be limited. The immediate support is now placed at 11200; maintain a bullish outlook until this is not violated.

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