What emerged as speed breaker of the ongoing bull run on D-St

The domestic equity market surprised many during the week gone by as it triggered profit booking and reversed the intermediate bull trend. Also, since the last two weeks, open interest in Nifty futures stood at 25 per cent below normal of the previous month, suggesting that fewer participants are convinced about the longevity of this rally.

Moreover, RBI in its first bimonthly review of this financial year observed that since there has been a slowdown last three consecutive quarters and the macros are not favouring growth. Globally, the growth engines are slowing, forcing central banks to turn dovish, which is why RBI too reduced interest rates by 0.25 per cent for a second time.

Dalal Street needs to align itself to these realities and is, therefore, heading for a correction, which should probably last till the last week of May.

Profit booking is expected in sectors such as PSU, private banks, realty, infrastructure and energy, which were part of the bull run and have already seen a sharp run-up. A mean-reversion is, therefore, imminent and traders may consider shorting only those sectors which have higher probability of seeing a correction rather than FMCG, auto, metal, IT and pharma, which showed no meaningful traction during this rally.

Event of the Week

Auto numbers are a big barometer to evaluate the health of the economy and last month’s numbers were very discouraging given the high inventory levels, production cuts and slowdown in sales. However, Mr. Market is nearing its all-time high. This is a macro factor divergence, as either auto numbers must increase in order to justify elevated market levels or the market has to correct to align itself with the ground realities of the economy; and the latter has high chances of happening.

Technical Outlook

Nifty50 is showing signs of fatigue, upward price velocity is getting weaker and weaker. Prices are nearing the previous top, which makes the likelihood of a double-top formation more certain. The moment prices break the upward-moving narrow trend channel, a serious correction of the entire rally will start.

On a closing basis, below 11,550, Nifty50 will confirm the breach of a narrow trend channel. Traders can go short below 11,550 for a swift correction on the downside.

Expectations for the Week

Both the earnings and the voting season will drive analysts crazy with the inflow of abundant news information and poll projections . But markets are expected to steadily correct albeit with higher volatility. Since the elections are just around the corner and they will dominate the bourses, investors are advised to wait patiently and not get carried away by the current rally or the expectation of a particular election outcome.

From a specific sectoral perspective, too many expectations are built around the IT sector and if the numbers are below Street estimates, they will pose as a big risk to the IT space.

Nifty50 closed the week 0.36 per cent higher at 11,666.