Sensex soars 500 points; will the rally sustain?

Though analysts maintain that the rally could have more steam left, this still remains 'sell on a rise market' for them

The decision by the US Federal Reserve (US Fed) to maintain status quo on interest rates for now lifted sentiment across Asian markets.

Back home, the S&P BSE Sensex gained nearly 500 points, or around 1.9% in intra-day deals and the CNX Nifty moved up 150 points, or 1.9% to hit touch 8,055 levels. Broader markets, too, moved in tandem with the S&P BSE Mid-cap and the S&P BSE Small-cap indices gaining 1.7% and 1.5%, respectively. India VIX, a gauge of volatility dipped 16.4% to 18.3875 levels after opening at a day's high of 21.9975.

"Nifty is nearing the GAP area witnessed on 24 August i.e. 8,222 - 8,074. A close above 8,074 could extend the gains to levels of 8,125 - 8,222 levels. On the downside, immediate support is at 7,945 levels. A close below this support could drag it down to levels 7,900," said Nitasha Shankar, Vice President - Research, YES Securities.

Does this rally have more steam left and should you buy at the current levels?

Analysts suggest the rally on Friday was led by banking and finance-related stocks, in hope that the Reserve Bank of India (RBI) would cut rates sharply after the Fed’s decision to not move. Though they maintain that this rally could have more steam, overall it still remains a ‘sell on a rise market’ for them.

Explains Siddarth Bhamre, head of research (equity derivatives and technical) at Angel Broking: “If you see the Nifty and the Bank Nifty, the entire run was fuelled by the latter. Since the US Fed hasn’t hiked rates, it has put pressure on RBI to slash rates in India. So, in anticipation that there will now be a substantial rate cut, participants are taking banking stocks higher in the form of short covering.”

Adding: “I am not very optimistic that RBI will cut rates sharply. Come winter, food inflation can substantially rise, given the sub-par monsoons this year. Though I agree that RBI can cut rates marginally, say 25 basis points, a sharp cut immediately is ruled out. I think for those who bought at lower levels of 7,600–7,700 can clearly book profit in the range of 8,050–8,100. I remain cautious on this market, which for me, is still a sell on a rise one.”

Devangshu Datta, an independent technical analyst and  expert says the momentum can take the Nifty to 8,200–8,300, where it is likely to face stiff resistance. The 7,750-7,800 levels (Nifty spot) are likely to act as a key support level, he says.

“One must realise that the problems in China will not go away in a hurry and the US Fed will hike rates – be it in December or in 2016. All this will eventually weigh on the sentiment. The Bank Nifty will witness action till September 29, when RBI will review its monetary policy stance. Over the next few days, the rate cut hope can take it beyond 18,000. On the other hand, in case the Nifty does hit 8,200-8,300, one should book profit and wait for it to dip to around 7,700 before taking a fresh investment call. This still is a sell on a rise market,” Datta says.