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Meandering Time Correction Most Likely Prognosis As Index Consolidates

A comprehensive breakout beyond 12,125 remains key to the rally developing further legs – in the absence of which we’re quite likely to see the markets settle into a more tightly bound rhythm.

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The bellwether index slowed down for the third consecutive week, in line with expectations. Given that the index is clearly struggling to break out of its upper channel, and the stochastic oscillator remains very firmly etched in the overbought zone, it can be said with reasonable confidence that the current swing is running out of legs, and the index is due for a retracement any time now. Given that the overall sentiment is positive and bullish, this retracement is unlikely to be significant, though. In fact, it may just end up being more of a ‘time correction’ than a ‘price correction’ given the strong bullish ‘risk-on’ undercurrent.

Pharma had a breakout week, with the CNX Pharma Index decisively breaking out past its 20 WMA levels, including a 3% plus mid-week single day rally. Another 300-point upside in the CNX Pharma will clearly signal a reversal of fortunes for the long-beleaguered sector.

The confluence of opposing factor continues to subdue the markets and prevent a comprehensive breakout. We’ve got global markets in the middle of a ‘risk on’ rally at the moment, and emerging markets, including India, can be said to be beneficiaries of this. However, there’s no ignoring the fact that the consumption engine has slowed down heavily. Offsetting this is the strong end to the monsoons and the government’s strong intent to disinvest. Clearly, the markets are already factoring in some strong future moves from the government to boost consumption.

Technicals-wise, we’ve witnessed a significant tightening in the bands on the daily charts. On the weekly charts too, we’re seeing the slant of the channels turning flat, despite September’s sudden breakout. A comprehensive breakout beyond 12,125 remains key to the rally developing further legs – in the absence of which we’re quite likely to see the markets settle into a more tightly bound rhythm. The immediate downside is capped at 11,400 levels.

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