Markets turn bullish thanks to tax cut

Indian stock market posted the biggest single-day gain in the last decade on last Friday. Corporate tax reduction to 25 per cent from 35 per cent announced by the Finance minister will increase the bottom line of the companies.

The Nifty earnings expected to improve by 5-7 per cent in the current financial year. This big-time tax reform measure is a sentiment booster and expected to attract foreign investors.

To encourage the new investments into the economy, the Finance Minister also announced that new companies established after October 2019 will have to shell out just 15 per cent tax.

Friday's a big rise in the benchmark indices recouped the losses of the last two months. With 569.40 points net gain on Friday, Nifty able close 1.8 per cent higher on a weekly basis.

The Sensex gained 1.7 per cent and Nifty Midcap rose by 2.3 per cent. Nifty smallcap ended on a flat note with just 0.4 per cent gain. The broader market index Nifty 500 closed 1.99 per cent higher.

On the sectoral indices front, FMCG gained the most with 4.4 per cent and followed by Nifty Auto 3.3 per cent, metal 3.7 per cent and banks by 3.1 per cent. On a flip side, Nifty media and IT indices closed with 3.7 per cent and 1.5 per cent loss.

Technically, Nifty has moved out of 30 trading sessions consolidation zone with massive volumes. A record level of cash volumes registered on Friday in the history of NSE. Even the delivery volumes also increased to a record level.

This shows that FM's announcement changed the sentiment to the positive side. The Friday massive gain moved the Nifty above the 50 and 200DMAs. As I mentioned earlier, any close above 11,181-11,200 will lead the Nifty to the levels of 11,370 and 11,540 levels.

On Friday, Nifty faced resistance at 11,382 levels and closed below the 11,370 levels. The triangle breakdown on Thursday negated or failed with this move. The failure triangle breakdown now ended with an upside breakout.

The surge in index suddenly changed the structure of the market. Technically, as Nifty made a higher high and high low, it entered an uptrend from the sideways consolidation of a downtrend. The accumulation days are important to strengthen the market.

Distribution days will certainly weaken the market. If the market witnesses a negative close of more than 0.25 per cent with above average volumes indicate the distribution. We are still 6.8 per cent away from lifetime highs.

Now the key resistance is placed at Friday's high 11,382 and 100 DMA 11418. Once these levels are taken out, the next strong resistance is placed the 11540.

This level is nothing but 61.8 per cent retracement level of 3rd June high to 23rd August low. Move above these levels will confirm the uptrend to the medium term.

But, 50 per cent recovery of 73 days of a fall in a single day will definitely attract the profit booking. Another reason for the sharp rise is short-covering by the traders. The sudden spurt forced traders to cut the shorts.

FIIs still hold Rs 1,700 crore worth of index shorts at the close of Friday. Any kind of profit booking will lead to some retracement to the downside.

In that case, Nifty support levels are placed at 11218, 11181, 11117 and 11036. Any fall below 10955 will turn Nifty bearish. There is a higher probability forming inside bar next week or the price action may be within the limits of Friday's high and low.

We need to wait until the end of euphoria and let the market cool off. In this process, the market will behave typically and this pattern can give future direction to the market.

The long-term trend depends on the improvement in the earnings. After a series of baby steps, the big bang announcement by the government changed the sentiment of the market.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)