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Markets to bounce back from oversold zone

The week ahead should see the market bounce back from heavily oversold zones as we head into the last week of March. The futures and options expiry on Thursday and a holiday-shortened week will see high volatility rule the roost next week.

There was a spate of negative news flow which started with the Cyprus crisis news last weekend and further escalated with the DMK party pulling out of the Union government. Further, the problems between the Sahara group and market regulator Sebi also saw escalation, which saw rumours emanating of the withdrawal of huge corporate margin funding that saw a ripple effect of pledged share selloff in the markets.

The Sensex ended the week down 3.56 per cent, while the Nifty lost 3.76 per cent. Technically, the Nifty is now within striking distance of its 200 DMA (day-moving average) at 5618, which should act as a support, while resistance comes at 5800. The high-beta Bank Nifty performed poorly and ended the week down 5.17 per cent. This after the Reserve Bank of India cut the repo rate by 25 basis points, which was in line with market expectations. The Bank Nifty has broken below its 200 DMA, which was at 11370. It now faces support at 11000 and resistance at 11570.

Despite the carnage on the stock market, the rupee held its own and closed the week marginally weaker at 54.33. The bond yields on the 10-year government paper, however, spiked up to 7.95 per cent. The Cyprus event could see some pressure on foreign institutional debt flows into our market as almost 50 per cent of flows come through the Cyprus route, which may have led to the spike in bond yields.

Globally, the Cyprus issue again highlighted the fragile conditions in the euro zone and sent the euro plunging to an almost six-month low. The Cyprus government would, over the weekend, face the European Union, the European Central Bank and IMF officials to request for a bailout, the results of which would see markets reacting on Monday.

In US, the Dow Jones Industrial Average continued to chart out new highs and saw bouts of weakness during the week to recover on Friday and close the week in the positive. The recent behaviour of global markets is clearly showing outperformance of the developed markets like the US, Germany and Japan, huge underperformance of the emerging Markets, with the BRIC (Brazil, Russia, India and China) markets facing huge redemptions.

The Nifty has retraced almost 8 per cent from its 2013 highs of 6130 to 5650 and is now in heavily oversold zone. With pessimism at its highest, markets should see a strong bounce back and in the holiday-shortened week levels of 5800 on the Nifty could be tested.

The Indian markets saw a huge liquidity-driven rally which saw the Nifty move from 5700 in early September 2012 to 6100 in January 2013. With the Nifty back to below 5700, smart money would now return to buy equity as the broader market sell-off has made certain midcap stocks and sectors come to very attractive prices. Also with most event risks like the Budget, the RBI policy, the DMK pull-out and euro zone problems resurfacing, most bad news is already being priced into the markets. This would be the ideal time to ignore the noise and buy equities for the remainder of the year and expect outperformance.