Nifty Review : Inflation data boosts the rally!

So the monthly inflation figure finally fell below psychological level of 7% (6.87% to be precise) for the month of July. As the data were released, the sleeping beast suddenly started to move ferociously. Within the next 5 minutes Sensex moved by around 100 points to 17718 levels as the fall in the WPI inflation came as a surprise to the market which was expecting it to be around 7.25%.

The day ended with both the exchanges remaining strong through out after that. Another positive  came in the form of Germany and France's GDP data. Germany managed to grow by 0.25% while France's GDP was almost flat. It was expected that they might post negative GDP data. This boosted the sentiments and thus was the rally.

Nifty shut shop at 5380.35 - pretty close to its day high. It is approaching a strong resistance point of 5400 and with some positive news coming around finally, it is most likely to break the barrier and trade higher.

Lets have a look at the EOD chart of CNX Nifty:

In the chart we can see the strength and the bullishness that Nifty has been showing since the low of 5043 it hit on 26th July 2012. The rally has been fueled mostly by the increased liquidity that has come into the system after the last monetary policy review by RBI in which it cut the SLR by 1% to 23%. This released 60000 Cr in the system. Hence, at the back of the favorable backdrop that is evident, the nifty has been heading higher. Now, today it managed to break its previous resistance of 5351 and has closed at 5380. In all likelihood, this uptrend will continue before it faces strong resistance around 5450 levels.

However, a look at the Food and Fuel inflation shows these data:
Fuel Group Inflation At 5.98% Vs 10.27% (MoM)
Food Articles Inflation At 10.06% Vs 10.81% (MoM))

The sharp decline in the Fuel Inflation seems more like an aberration. This might be corrected during the next month inflation number as has been the trend for quite some time. Moreover, the sudden jump of the Brent crude to $113-114 a barrel over the Iran situation will certainly be reflected in the next month's data.
Government has finally accepted drought situations in some states including Rajasthan which will certainly push the food inflation higher. Thus the present data of a fallen inflation may not sustain in the coming months.

But the market is in a juvenile state at present and might continue to do so till it faces the technical resistances. Till then traders are advised to hold on to their long positions and should take positions in metals, auto and bankex.
However, in these sectors too, being stock specific will certainly be worthwhile.

Happy Investing!