Why the Sensex has rallied 600 pts today and will the up move sustain?

Last week, Indian bourses saw their worst weekly fall in a decade with the S&P BSE Sensex and the Nifty50 tumbling nearly 7 per cent each during this period.

A drop of nearly 3 per cent on Friday amid a global sell-off on coronavirus health scare and fears that weak economic data from China over the weekend ticked most of the checkboxes that could have sent the markets spiraling down further as they opened for trade on Monday. However, the over 600-point up move intra-day caught many by surprise.

The markets, analysts say, over-reacted to the developments and sold-off in a panic mode on Friday. The rally on Monday, according to them, could also be on account of short-covering. Most global markets suffered their worst weekly fall since the 2008 global financial crisis last week. The velocity of the fall in stocks was sharp across markets in Asia, Europe, and America. Indian bourses, too, saw their worst weekly fall in a decade with the S&P BSE Sensex and the Nifty50 tumbling nearly 7 per cent each during this period.

“The markets now seem to have realised that coronavirus may not be as bad a scare as it was made out to be. The only way it can spread is via physical contact amid conducive temperature / climate. India, though not completely insulated from the global meltdown in financial markets, is still relatively safer as regards this health scare. I don’t see the markets selling-off in a way they did on Friday. There can be intermittent corrections but quality stocks will start to perform now,” says A K Prabhakar, head of research at IDBI Capital.

Another reason is the hope of a fiscal stimulus by global central banks to prop-up growth, which was already hit by US China trade spat, till the onset of coronavirus made things worse. The developments, according to experts, are enough reasons for central banks to cut rates and inject liquidity into the system to aid growth. This, in turn, will benefit most asset classes.

“The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy,” Fed Chairman Jerome Powell said over the weekend.

Technical view

S&P BSE SENSEX: The daily chart shows a bigger weakness as the major support levels are broken. For the index, 39,500 now becomes the immediate resistance, which was earlier acting as a support. The reversal seen on Monday needs to close above the Friday high, which is 39,087 levels. Only then one can be positive on Monday's bounce back. The support remains at 37,900 levels. CLICK HERE TO VIEW CHART

NIFTY 50: Monday's opening trade is above the Friday’s high, which inevitably shows positive strength. Going forward, if the index manages to close above today’s open, i.e 11,387 levels, then the downside should be capped around 11,300 – 11,280 levels at least for few sessions. The upside bias is located at the gap-down level of 11,536. The RSI has bounce-back above the oversold territory is signaling positive momentum, which may continue till the downside level is held. CLICK HERE TO VIEW CHART