The overall undertone is bearish and the Nifty may decline to 4,200, while the Sensex is likely to find support at 14,000, indicating a downside of 35 per cent for the two indices.
The two important events due next week, the settlement of June futures contracts on June 26 and the US Fed meet on June 25, are likely to determine the direction of the market.
Market analysts are advising traders to cover their short positions before the Fed meet. The Nifty has put options concentrated around 4,100 and 4,200 strike prices for the June contract, which effectively should work as support, at least till June contracts expire.
The benchmark indices have touched new lows in the last three trading sessions, but the relative strength index (RSI), a momentum indicator, has not hit new lows.
The nine-day RSI of the Nifty had touched a new low of 9.16 on January 22 and is currently at 28.09. This is a positive sign, though technically markets are oversold now.
RSI essentially shows the ratio of price movement on days the asset price rises compared with price changes on days the asset price falls. The Nifty had corrected sharply in January (down 1,100 points in six trading sessions) compared with a fall of 300 points in three trading sessions.
Foreign investors were net sellers last week as they sold equities worth nearly Rs 2,405 crore. They have sold equities worth Rs 10,150 crore in the 15 trading days of June. FIIs have been net sellers on the F&O segment, particularly in Nifty futures when covering their short positions by buying Nifty options.
Stock-specific activities will be clearly evident next week after the annual inflation rate rose above 11 per cent this week. All interest rate-sensitive sectors like banking and financial services, construction, auto and capital goods are likely to be weak during the week.
