A Litmus Test in the Offing

The Indian stock market has been on a roller-coaster ride in the last one week or so. However, despite such ups and downs and the concerns related to global events, the Nifty has maintained its rhythm of not correcting more than 3-4 per cent from its recent swing high since April 2021. The recent decline from the all-time high also halted at 2.76 per cent, which clearly indicates that the template is of ‘buy on dips’ and not of ‘sell on rallies’. However, the problem with the buy on dips template is that when the market actually declines the sentiments turn so fearful that it makes us feel that the decline could extend. But within no time, the bulls make a strong comeback, and the rest, as is said, is history.

A similar sort of plot was quite visible on Wednesday as well, wherein the stocks and the Nifty tumbled down. The formation of a bearish engulfing pattern would have scared the life out of investors. Even the permabull investor (someone who consistently acts in the expectation that the value of stocks and shares will rise) could have got easily jaded as there were multiple concerns at the back of the mind such as valuations which still remain elevated. In the meanwhile, inflation is proving to be sticker than expected and the US Federal Reserve is likely to move forward with ‘tapering’ their balance-sheet purchases in November.

However, here is where a trend template comes handy, which we have been advocating since a long time. The best way to make money is to be with the trend. If you take into account the weekly chart of the Nifty, we haven’t seen a significantly lower low, which makes us believe that any decline should not be viewed as negative. Rather, any decline should be capitalised on to focus on ideas emerging after forming sound bases with improved relative strength performance. Some key developments which took place on the domestic front include global rating agency Moody’s Investors Services retaining the lowest investment grade rating on India’s sovereign rating but changing the outlook from ‘negative’ to ‘stable’.

This move is a good one for India since it indicates to the world that the Indian economy is turning the corner and poised for a big leap forward while also highlighting the immense potential that India offers as a global investment destination. Furthermore, the upgrade would result into bringing down the cost of borrowing in the international market due to the fact that India can issue its debt at lower interest rates. That said, market participants should closely watch the movement of the US Dollar index and the US bond yields. Technically, they are close to a very important level and sustaining above these important technical levels could potentially lead to upside breakouts in the US Dollar index and US bond yields.

Also, one should closely track the movement of crude oil prices as recently the oil prices have jumped to the highest level since October 2018. And these are expected to stay firm in view of the forthcoming harsh winter. The sharp rise in global energy prices is a matter of serious concern for all. The prices of natural gas and coal are now at multi-year highs. The sharp inflation in energy prices is becoming a global crisis and being seen as a major threat to global economy recovery. Going forward, market participants will look towards the outcome of two key events which could dictate the near term mood of the market.

First is the policy outcome of the Reserve Bank of India (RBI). The central bank is expected to maintain its accommodative stance to maintain adequate liquidity in the system and to support economic activity. However, the focus of the market participants would be on the commentary of the RBI governor for hints over the direction of the economy. Secondly, the Q2 earning season will kick off on Friday with IT bellwether TCS set to announce its earnings. Investors would be all ears on the management commentary to understand the outlook of the IT sector as most of the forecasts are already factored into the market price. Thus, the next couple of weeks are going to be a litmus test for the market. We would continue to advise our readers to follow the trend and not panic until we make a lower low on the weekly chart.