Why exactly will the Nifty bounce back?
With the Fed meeting on the 3rd, I guess it will be more of a wait and watch scenario, except for some foreign funds who may choose to exit and then enter if interest rates are not raised, or if there is a rate hike with something to say that no more rate hikes in the near future. If you check out the open interest of the FIIs, its pretty high... around 9800 crores. I guess the short term traders are pretty well hedged and may not hesitate to pull out from the cash markets... especially funds that are invested in India with money leveraged from the US.
Commodities all around the world are coming off their highs. With so many commodity stocks listed on the local bourses (and quite a few included in the Nifty), the global effect is beginning to weigh on them. Check out the performance of the Indian IT ADRs on the NASDAQ. Infosys is down from a high of around $77 to around $58, and that too in a matter of a month. Not that the US tech stocks are doing all that well either. And add the problem of corporate governance to it. How many Indian companies have a substantial free float in the market? Especially in the mid- and small cap space? Even a modicum of a lack of proper corporate governance can add quite a substantial risk premium to Indian equity.
On the F&O side, the May futures are trading at a discount of 20 points. Even if you adjust for the dividend yield of the Nifty stocks, the gap is pretty substantial. Just coz the basis reduced towards the end of trading Friday, I dont see any reason than to think that the markets are going to bounce back. Even on the single stock futures side, quite a few futures are trading at a negative basis.
On the technical side, yes 1900 did hold. But it was broken in intra-day trade and the market closed almost at the lows of the day. Again, not a very comforting thought. Most of the technical indicators are in sell mode, but then they would be in a downward trending market. 14 day RSI is around 30, and is making higher bottoms, while the market is making lower bottoms . This negative divergence could mean that the markets could move higher. The supports are at 1882 (200 DMA), and at 1850 from the upward sloping trendline joining the intermediate bottoms.
Hope I havent painted too gloomy a picture, but thats the way I see it and as they say "the trend is your friend". Shorts could be reduced around 1880 levels and then around 1850 levels. But to go long, wait to see if 1900 holds atleast short-term with some pickup in volumes.