Reasons why the recent slide may not actually lead to a reversal in the primary trend!!
India’s broad index, Nifty- 50 slid about 8 percent from the all- time highs of 11171.55 realized towards the end of January this year. On charts, the index is due for a steep correction in the trend based on the “Island Reversal” pattern that was formed following the gap down opening on February 2nd. Although the Nifty is currently trading below the January highs, the sharp slide that followed the breakout of the candlestick pattern looks to be curbed for now with the Index oscillating between 10300- 10600 for the past few weeks. However, the current market scenario looks very different from the earlier ones and a reversal in the primary trend that many market participants expect may not actually take place for the following reasons
Liquidity driven market-
Following the Central Government’s decision to demonetise currency notes in November 2016, the large amounts of notes flowing back into the banking system saddled banks with huge amounts of cash deposits. Unused, they would create a liability for the banks in the form of interest to be paid out, but the banking sector found a way of infusing a large amount of the money back into the markets. RBI data on bank credit specifies the massive loan growth in the portfolio of banks since demonetisation. The exception of course were PSU banks with large NPA’s who were using the deposits to shore up their books.
In addition, investments by EPFO into the equities markets which was zilch until August 2015 has gradually increased and the organization with an equity exposure of $44,000 crores at the end of 2017 is expected to raise its investments in equities from 15 percent of the total contribution to the fund to 25 percent, raising the exposure of domestic institutions in the equities markets.
Interest rates likely to remain near record lows-
Until a few years back, the largely risk averse Indian population comprising of the salaried class generally parked their funds in term deposits with banks and post- offices, typically considered safe haven investments, free from the risks of the volatile equities and commodities markets. The stock markets were a no- never and they were satisfied with the 9-10 percent returns earned on the deposits.
However, with key interest rates down from 8- 6 percent since 2014, the lowest since late 2010 and long- term deposits averaging around 7 percent in the last couple of years, the risk averse middle class in India are left with few options but to invest some part of their savings either directly in equities or take the MF route to protect themselves from low returns on term deposits and rising inflation, which was last seen hovering around the 5 percent mark. The changing habits of retail and high- net worth investors in India has led domestic institutions to scale up investments in Indian equities, taking foreign institutional investors head-on.
Unless interest rates begin to rise, the growth in retail investments into equities will continue to surge.
Spot Nifty slid around 8 percent from the recent highs and although the Index has since recovered, it is broadly trading in the 10300- 10600 range. The bullish primary trend however, remains intact in spite of the recent fall and will continue to remain so unless Nifty slips below 8200.
In the near term, Nifty is well supported around the 10375 levels. A close below and the losses could extend to 10100. On the upside, key technical resistances are placed at 10620, a close above which the Index could head to 10900.
Short- term traders looking for entries can go long around 10375 with stops at 10335 for targets of 10500. On the flip side, if the index breaches 10335, reverse long trades with stops at 10415 for targets of 10100- 10125.
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