Stock Market Rally, Inflation and Crude prices are halted! Will the down trend resume?

Our markets have paused and corrected mildly yesterday, after a spectacular rally of 17 to 18% from the lows made on 16.07.2008, a head of inflation data, US housing and Jobless claims data, finally 50DSMA Nifty(4439.03) & Sensex(14881.13) proved to be a good resistance for both indices, and both indices have closed below it yesterday. While Put-Call Ratio is stable at 1.4, Nifty futures have closed at a premium of 9 points. Most of the shorts have been closed, and premium on both current series as well as next month series indicate over bought situation, and the new confidence returning back from even retail investors, which is evident in strong rally in momentum stocks already, is a dangerous sign. Inflation has cooled a bit to 11.89% as against 11.91% previous week, as per the data released yesterday at 5 p.m. is a good news for our markets, though the WPI is showing uptick. The rate of raise is moderating for now, whether it will fall further depends on 'monsoon' which is so far good over North India, and very poor in Southern States. Apart from it, the self imposed moratorium imposed by steel majors to hold prices for 3 months, expires by 01.08.2008, as the input costs are not coming down, thus, the prices of steel might go up which again is inflationary. Crude has cooled 16% from all time high of 147$ and currently trading around 125$, due to profit booking by investors, who are watching the demand destruction on one hand, as well as strengthening of US $ against Euro, as expectation of Fed start raising interest rates from now on, is bringing some cooling in commodity prices.

VIX closed at 40.29 yesterday, while the high was 51.65 indicates return of volatility to our markets, as roll over of derivatives positions to next month series already commenced, which will pick up further from now on. The volumes for the past two days on our bourses have risen substantially, is a sign of increased participation; the small and retail investors, need to be careful and should not be over enthusiastic of the rally as it is just a relief rally of deep bear market, which will not last longer, as the macro economic situation yet to improve. Reliance results are in line with expectations, the threat of 'windfall tax' demanded by Samajwadi Party, whose support to UPA Government is crucial in the current situation, is a demoscle's sword, on oil companies. ACC results are below street expectations, due to the raise in costs, and price control induced by government, to check inflation, is showing its toll on the performance. RBI's Credit Policy to be announced on 29th (Tuesday) a head of this month's settlement due on 31.07.2008, may not announce further raise in interest rates or CRR should soothen the markets. Cabinet has cleared the merger of SBI with SB Saurashtra, for which an executive order might come, shows the commitment of government to push the reforms azenda, since it is liberated from Left's restrictions which were holding this and other financial bills.

US markets have tanked overnight, asian markets are trading in negative territory currently. Singapore Nifty futures are currently quoting at 80 points discount, which induce weak opening for our markets too and whether support comes at 5DSMA levels Nifty(4280.44) & Sensex(14261.79) is to be watched, and the final closing of today, shall anyway be higher than previous week's close. Markets will witness two way movement, amidst higher volatility, as the bulls try to hold their new found initiative against bear onslaught, who have all ammunition to bring the prices and markets down in medium & short term too.

Range for the Day: Nifty might trade in the range of 4300 to 4500.

Strategy for the Day: Buy 4300 calls on weakness and hold till monday.