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Tuesday, September 27, 2022

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Optimism For Week Ahead Continues

What is important is that the prices should hold the lows created last week. Friday’s tap lower ought probably to qualify for a higher bottom retest. Unfortunately, the chart stop-loss point would continue to remain beneath the June 17 low. That would be for positional traders and day or swing traders may have to create their own stops.

On this matter related to Reliance, there shall definitely be some number crunching about the impact of the levy. The way the stock has rebounded from its lows would hint at some recovery next week. So that may be something to watch for as it would remain the negativity that gripped the Nifty on Friday. For that matter, even the Nifty itself managed to recover well from the initial losses and finished the week better.

But there is one worrying element for the market and that is the weakening of the Indian Rupee. The fourth chart shows the steady progress of the U.S. Dollar against the rupee and as matters stand, it doesn’t really seem like the dollar bulls are going to relax their grip on the trend.

A weak rupee is always bearish for the equities. We have some range expansion for the week ended and there is a possibility of a slight pullback, perhaps towards the 77.50-78.00 levels. But the main trend remains up and dips are to be used to create longs in any Dollar/Rupee contracts.

The rollover into July was uneventful. Overall position overhang has reduced a bit. That data also shows something that we had discussed last week: the bullishness in the auto sector. It is the only sector where total open interest has increased. Interesting to see also that the OI in pharma is at its lowest since Jul 2020. This clearly shows the lack of interest in pharma names and one should therefore not butt one’s head over there in expectation of improvements. I say this because pharma stocks are one of the most preferred stocks for trading but they have been creating losses for the suitors for a long now. The OI data just confirms that the big guns have left this space alone for now.

A small study also states that there have been many instances of the Nifty posting losses in three successive months—as has happened now—but never for a fourth. From that angle too, we should see some rally emerge in July, however limited it may be. The average return, as per that study shows a gain of about 5% in the fourth month. Key triggers will be the Q1FY23 results flow and the progress of the monsoon.

Summing up, we need to be looking for follow-through price action in the week ahead and for the 16,000 levels to be crossed. Momentum indicators need to improve to keep the rise going. We need to keep an eye on the Dollar/Rupee moves and what, if anything, the RBI does. The Q1 results will start flowing only from around the end of the next week so we may yet be sensitive to global news flow. Cautious optimism is a phrase often used by fundamental analysts and I find myself echoing that as we go into the next week. Long with a 15,500 stop would be a trading recommendation for Nifty.

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