What is your trading view for Thursday, 07th October? Will the markets bounce after the sharp correction yesterday?

On Wednesday, the Nifty started off in a rather tepid manner but went on to heavily lose value in the second half. The signals were there on the previous day as markets continued to rise amidst institutional selling. With little shorts to cover, the markets reacted negatively to the Evergrande crisis and also to the First Chinese loan default by Fantasia.

The real story of the market was in the Advance / Decline ratio, which was deeply negative in the ratio of 8:42. Across the board, the heavyweights faltered with the mid-caps and small caps also seeing some very deep cuts in trading. The fear index or the VIX shot up sharply to above the 17.50 levels on Wednesday and that could be an overhang.

FPIs were net sellers on Wednesday worth Rs.803 crore in equities while domestic funds sold Rs.999 crore. It was largely the China default factor. Meanwhile, on 06-Oct, the European markets were deep in the red losing over 120 bps each while Dow and NASDAQ were up 30-50 bps. SGX Nifty is up by around 80 bps in early trades on Thursday.

The real question is how will the Chinese default impact the Indian markets and that is a bigger risk than the RBI hiking reverse repo rates or the US talk on inflation. The focus for now will be on China and that is the overhang. For this week, any bounce is likely to met with selling on the Nifty and Sensex at higher levels.