My opinion about how the things are going to pan out -
A very short term picture
I think we have completed the first leg of the correction after the recent top of 4600 and there is a likelyhood of a rally to upto 4300 on nifty. I am thinking of buying a couple of 4100 calls if I get them under 120 or I'd just buy one. Square that off when nifty reaches 4300 or when Reliance reaches 1825 or when premium reaches 200 and stop loss at 80 or when nifty falls below 4100 (yesterdays closing.) even intra day. 4300ish looks a decent resistance level right now, with three indicators 50% of the drop between 4600 and 4000. Resistance from the descending trendline connecting recent tops and 50 day EMA. So that will be a good place to get out of long position and do fence sitting. most likely it'd hover around that level. If it starts correcting from there, we've formed a good head and shoulders reversal pattern that should take us to 3650 levels on nifty. If 4300 resistance is overcome, there are chances we'd go all the way upto previous High of 4600 and then that becomes a double top reversal and the downside is somewhat the same 3600ish slightly more. There is a reason why market should go up from here. There is about 5 billion dollars of FII money trapped and the market is roughly where it was before this rally started (nifty 4100ish), so the money needs to get out and we need a rally for that and yesterday's Fed rate cut have provided the right sentiment for this. I'll be watching daily FII activities in cash segments, if the pattern of withdrawals remains constant, it implies that money is leaving. By the time we reach 4300 levels if there is a net inflow of atleast 500M$,it might imply that we'd go past the previous high and then the double top formation doesn't hold and there is a possibility of a bigger rally taking nifty upto 4800ish levels. (In my humble opinion I don't see a reason why that should happen, especially looking at the 'repricing of the risk' sentiment, but I have a right to be wrong! ;-) )
On a bigger picture, on a weekly chart (see above), we are running very close to the big trendline that started from 2003 bottom (start of bull market) and connecting all the intermediate bottoms. So looking at that, we need a bigger sustained rally for the bull market to remain intact and that needs money. So I was looking at FII inflows starting from 2003 the year when bull market started. 2003 had net FII inflows of roughly 6.5B dollars, 2004 had net FII inflows of 8.5B, 2005 had net FII inflows of 10B, 2006 had a net FII inflows of 8.5B and by today net FII inflow in 2007 is roughly 9B. Remember, as we go to higher levels, we need more dough to keep the rally, so looking at the arithmetic progression, we need somewhere close to another 5-6B $ net FII inflows in the coming months. That is not impossible, but again looking at 'repricing of risk', this looks a tad difficult. In short, we are running out of breath for the bull run, unless there's an energy drink (Red Bull) coming from somewhere.
I have been assuming in this discussion that the bull market will only continue if there is enough FII flows. However the past tells us that, the whole bull market is fed by the FII money, so the assumption is not entirely incorrect.
Regardless of whether the bull market remains or not, I am going to be playing week by week.
Disclaimer: The opinions are completely personal and should not be taken as investment advise in any way. Investments should be made solely on the basis of personal risk appetite and investment objectives.
1. The chart is taken from icharts.in
2. FII inflow figures are taken from SEBI website.
3. Technical analysis by vivek patil on ICICI direct.