Critical Week For The NIFTY As Index Cracks Below Key Support

The index turned bearish last week, as heavy selling pressure pushed stock prices down. The bellwether index took a dangerous tumble below the lower Bollinger Band on the weekly charts. The last trading session witnessed tremendous drama, with the NIFTY cracking over 150 points before a late surge took it into positive territory at the close. In fact, the intraday trading range was more than 200 points!

The dip below the 11000-mark witnessed sharp buying interest, once again underscoring the fact that the index remains broadly oversold at current levels. In fact, the current NIFTY level itself remains misleading - if one were to exclude the top ten stocks from the index, we would actually have a NIFTY level that's nearly 20 percent lower than current levels. A very large number of BSE 500 stocks have now cracked below their book values and appear ripe for a rebound once the current negative sentiment dies down. Mid and small cap indices are even cheaper.

Today’s weak opening notwithstanding, Friday’s late surge augurs well for the index. With expectations of another 25-bps rate cut on Wednesday, sentiment may well turn positive soon. The current week will be a critical one for the NIFTY. If the index funds support around the 11000 mark over the next 5 trading sessions, we're quite likely to witness a momentum turnaround that will take it at least 500 points higher in the next wave. On the other hand, if it doesn’t find it’s feet, we may well see it hurtling down to the 10,000 mark that we saw in October last year.

However, investors are strongly advised not to bet on any particular market level, as there’s no saying exactly how far down the short-term negative sentiment will push the index down to this week. That said; current valuations, coupled with the fact that the index is strongly oversold across timeframes, makes for a strong case for building up your equity allocation in a staggered manner at current levels – but strictly for long term investors and not for traders.

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