Nifty crashed in accordance with our outlook and has taken support around the important 8570-8600 zone mentioned in our previous post. The subsequent rally on Monday is encouraging. The Indo Pak relationship meanwhile has hit a new low. It remains to be seen if we are in for a new normal in Indo-Pak relationship when it comes to the altercations on terrorism. From the look of it, India’s surgical strike has called the bluff on Pakistan’s rhetoric for nuclear retaliation, which was probably the biggest concern for Indian markets.
Equally amusing is the persistent denial of surgical strike from Pakistan establishment. But this has given them a plausible deniability with respect to recognizing the existence of terror camps, or taking any retaliatory military action against India. The subsequent terrorist attack on Monday means the proxy war continues. It remains to be seen if further surgical strikes are carried out by the Indian army and whether the other side continues to deny validity of such strikes. If so, a new normal would have been established. This would provide some degree of sentimental positiveness to the equity market in the short term. But, in the long run it may lead to a degree of implosion within Pakistan as terrorist organizations build pressure on establishment to provide them more overt support. This may ultimately result in further strain in Indo-Pak relationship and result in sentimental concerns for the stock market later in the year.
Price wise we may see some kind of pull back towards 8680-8700. It is very important for Nifty to break the crucial 8801 level which would considerably increase the odds that the low of 8566 on 30th September would become a substantial low (specially if we are seeing a zig-zag or triangle correction). A break of this level should see a move towards 8879-8893 zone, which is the next important resistance. There is still substantial probability that the correction is not over and we are in the process of forming a broader corrective pattern. But even in this scenario the probability is high that amplitude wise the worst is over and the low of 8566 may not be violated. If we do not break below this level we may expect the next leg of the rally to extend to 9121-9171.
Also RBI’s monetary policy is due on October 4. Looking at the price structure for 3-month yields we won’t be surprised if we see at least a 25bps rate cut from the new governor. In view of this it would be prudent to maintain a bullish bias over the short term. Nifty Chart Below: