By Dharmesh Shah

Equity benchmark extended breather over second consecutive week tracking subdued global cues amid concerns over higher yields after US downgrade. The Nifty settled a volatile week at 19,517, down 0.7%. Meanwhile, the broader market outperformed, as Nifty Midcap, Small cap relatively outperformed the benchmark by gaining 0.7%, each for the week. Sectorally, IT, pharma outshone while realty, PSU Bank, FMCG relatively underperformed.

Technical Outlook

The index pared initial gains and extended losses and closed below past two week’s lows for the first time since the end of March. As a result, weekly price action formed a bear candle carrying lower high-low, indicating pause in upward momentum after recent sharp up move. Going ahead, we expect Nifty to prolong the ongoing consolidation in the broader range of 19,900-19,200 wherein stock specific action would prevail amid progression of ongoing earning season.

In a secular bull market, secondary corrections make the market healthy by cooling off overbought conditions. Thus, accumulating quality stocks on dips would be the prudent strategy to adopt at current juncture. The midcap index has endured its record setting spree over eleventh consecutive week despite profit booking in the benchmark, highlighting inherent strength.

However, past five months remarkable 30% rally hauled weekly stochastic oscillator in overbought territory while breadth indicator (% of stocks above 200 DMA) has approached overbought condition (placed at 91) , suggesting possibility of temporary breather at higher levels can not be ruled out. Thus, focus on accumulating quality stocks in a staggered manner.  

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On the global macro front, Brent crude oil and Dollar Index have seen technical pull backs at a slower pace after two months decline. We expect upsides to be capped at $87 and 103.5, respectively. As the domestic equity market has an inverse relationship with the aforementioned macro factors, we believe resumption of downward momentum in crude oil and dollar index will fuel the rally in the domestic equity market. We believe, any extended breather from hereon would get anchored around key support of 19,200 as it is confluence of: 

  1. 61.8% retracement of current up move (18,645-19,991), at 19,160;
  2. 50 days EMA is placed at 19,174;
  3. July month’s low is placed at 19,234

Sectorally, the Pharma and Power sectors have exhibited resilience last week amid volatility. We expect these sectors to relatively outperform while rate sensitives like BFSI, Real estate are expected to witness buying on dips opportunity in coming weeks. On stock front, in large cap we prefer HDFC Bank, TCS, Ambuja Cements, NTPC, Hindalco, Lupin, Tata Steel, GAIL while in midcap Astral, Birlasoft, Bank of Maharastra, HEG,  Kajaria Ceramics, Laurus Lab, Praj Industries will remain in focus.

Nifty Chart

Bank Nifty Outlook

The Nifty Bank index extended decline for a second week in a row amid global volatility and some earnings being below expectation. The Nifty Bank index closed at 44,879, down 589 points or 1.3% for the week. The price action for the week formed a bear candle with lower high-low formation indicating corrective bias as index entered overbought trajectory after strong 20% rally from March lows. 

In the process index also breached prior month lows. Index however attracted some buying demand near its 50-day ema of 44,500. Going forward we expect 45,500 to act as an immediate hurdle in the coming week while decisive breach below 44,500 may lead to panic reaction towards 43,800 in the short term which will present buying opportunity. Structurally, the ongoing corrective phase would make markets healthy from a medium term perspective. Follow the buy on dips template. In the coming week inflation numbers and RBI policy outcome would set the tone for further directional bias.

(Dharmesh Shah – Head Technical, ICICI Direct. Views expressed are the author’s own. Please consult your financial advisor before investing.)