Nifty Technical Outlook: Market Bullish On Good Monsoon Forecast

Against all common sense and logic, the NIFTY turned bullish last week. Profit booking, concerns about the ongoing US-China trade war, and the RBI’s decision to raise interest rates by a further 25 basis points, drove the NIFTY down nearly 1% on Thursday, to 11,245 – only for the bellwether index to pose a stellar comeback on Friday, jumping 116 points to close higher than its previous weekly close, at 11,360. The purported reason for this price recovery was a ‘good monsoon forecast’.

Investors who have been observing the current 1350 point + rally in the index from the side-lines should bear in mind that the P/E ratio of the index after today’s closing stands at 28.23 times - which is actually at the same levels as the dramatic highs of 2008.

While the momentum still remains overbought and valuations remain stretched, the NIFTY has been extending on its impressive rally that commenced at the end of March. The current market rally seems to be merrily ignoring the lack of earnings growth and stretched valuations, which isn’t a good thing in the long run, as such unfounded rallies usually led to bubble valuations and don’t end well. In fact, it’s worth noting that the EPS of the NIFTY has risen by a mere 2% on a YoY basis!

While a healthy correction could be just around the corner now, it’s become quite clear now that (against all logic), the past two weeks have signalled a broader momentum shift in the NIFTY from ‘range bound’ to ‘moderately bullish’. The 20-week moving average which is around the 10,700 – 10,800 mark, will now form a very strong support for the index, and we’ll need to wait and see whether the index forms a new base at those levels.

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