Weekly Outlook of Nifty from June 24 - June 28

Last week it was mentioned that ‘The index was in oversold state and Nifty exactly took support from the trend line support at 5690 and bounced back forming a bullish reversal pattern known as ‘Morning Star’. Nevertheless 70% of the up move was due to short covering. Considering the trend line support of 5690 in Nifty fut plus the short covering with the bullish pattern of ‘Morning Star’ I expect the market to rise further till 5950. Nevertheless this bounce back should be treated as a Dead cat bounce.’ What happened next? Nifty dead cat bounce took it to 5863 and then there was a global sell off seen in equity and bond markets which pulled down nifty back near 5600.

The present correction may be providing a good opportunity to add fundamentally strong stocks at reasonable prices. There is good reason for investors to feel bearish as FIIs have been selling for two straight weeks. Technically, the weekly chart of Sensex has closed below its 50 week EMA and Weekly technical indicators are turning bearish.

The 18500 level and 18186 is likely to act as a support. The longer-term up trend line has not been tested and breached.

A drop below 18150 may lead to a test of the uptrend line. A breach of this up trend line currently seen at 17250 may end the 18 months long bull phase. So, be cautious and keep appropriate stop-losses, but no need to panic.

The daily chart of Nifty shows a break down below the ‘falling wedge’ pattern followed by a ‘pullback’ to the lower edge of the wedge. Despite an intra-day breach of the uptrend line of Nifty fut at 5690, the Nifty index has just tested the uptrend line which is near 5600 and the Sensex closed on top of the line, giving temporary breather to bulls.

Now the situation has turned trickier. The technical indicators as well as Derivatives indicators are in oversold zone but smart money indicator is not showing any sign of recovery and on the contrary it is turning worse.

Conclusion: As per the charts major technical indicators are in oversold zone. The highest open interest is for Put option at 5600 strike price and there was further addition on Friday which suggests that it is very unlikely that NIFTY index can break 5600 level before this expiry. However, there is equal addition in Call option open interest too. Note some positive divergence is also seen in Nifty. So I suggest to short NIFTY only if it breaks 5600 along with decline in open interest for Put options in the coming week. Otherwise I think Index is ready for another sharp bounce till 5776 before expiry on this Thursday.