Retracement To 11,600 Likely As NIFTY Hits Headwinds

The bellwether index failed to continue its canter last week, with global rating agency downgrading India's sovereign outlook from 'stable' to 'negative', in light of deteriorating macros and the uncertainty regarding the fiscal gap that is likely to be created as a result of September's watershed corporate tax cut announcement. To boot, the trade talks between US and China turned uncertain again, resulting in risk aversion across the board. Traders appeared to be averse to carrying forward long positions over the weekend.

Although markets seemed to have brushed aside the blow dealt by Moody's for most of Friday's session, a late selloff resulted in a drop of 0.86 percent in the NIFTY on Friday. Private data showing that India's manufacturing has slowed down to a 2 year low undoubtedly weighed heavily on broad market sentiment as well.

On the technical front, we've already seen the index hitting a wall on the daily charts at the upper Bollinger band. Friday's move confirms that the retracement has commenced, and will likely continue until the 11600 - 11650 levels, which is likely to be the 20 DMA level when the index coincides with it. 

The formation of the classic inverted hammer pattern on the weekly charts, and that too after the index briefly sliced past the upper Bollinger Band, further indicates a temporary trend reversal within a broad trend that continues to remain bullish. In this truncated 4 day trading week, we are quite likely looking at a flattish momentum with a negative bias, with the next strong support around the 11600 mark. We continue to be in a buy on dips market, and the risk reward doesn't justify bearish positions.

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