By Dharmesh Shah

Week that was – The equity benchmarks extended gains for the third week in a row as rate sensitives led the rally amid lower inflation data. Nifty closed the week at 17828 levels up 1.3%. Broader markets relatively outperformed as Nifty Midcap and Small cap indices gained 1.75% and 1.5%, respectively. Reset in inflation and rate cycle expectations led Auto, and Realty to gain over 3% each while BFSI and Pharma continued to rally for the third week with >2% gains

Technical Outlook

  • Index continued its winning streak on all four trading sessions leading Nifty to recover >1000 points from March lows of 16800. The weekly price action formed a sizeable bull candle reflecting a continuation of a positive trend for the third week and surpassing the previous month’s high for the first time since December 2022
  • Post Nifty’s 1000-point rally over the past eight sessions, led it to a short term overbought trajectory with a daily stochastic reading of 96, thus raising the probability of a temporary breather at current levels. Post this we expect Nifty to resume an uptrend towards 18100 in the coming weeks with key support now being placed at 17500 levels. Use dips as buying opportunity amid the onset of earnings season. Our positive view of the market is further validated by the following observations:
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  1. For the first time since December 2022, the index posted a faster recovery of the last declining segment. Nifty recovered 15 session decline (18100-16800) in just eight sessions indicating structural improvement
  1. 55% of the Nifty500 constituents are above the 50-day moving average this week. Strongest breadth reading since December 2022
  2. FII inflows have been supportive with the US dollar in a declining trend. We expect further weakness in dollar to lead continued foreign money flow
  3. India VIX closed below 12 indicating low risk perception of market participants
  • Sectorally, BFSI, Auto, Capital goods and infra, PSU and Realty to lead the rally
  • On stock front, in large cap HDFC Bank, SBI, Maruti Suzuki, ONGC, Hindalco, DLF, Titan Inds, SRF are preferred while in midcaps we like IDFC First Bank, Lemon Tree, Balkrishna industries, Minda Corp, Navin Fluorine, IGL, Tejas Network, KEC
  • We expect broader markets to witness catch up activity as Nifty midcap and small cap indices have resolved out of four month falling channel indicating end of corrective phase 
  • Structurally, the formation of higher high-low on the weekly chart makes us confident to revise support base at 17500 as it is 31.8% retracement of three-week rally (16828-17842) coincided with rising 200-day ema (17524)

Bank Nifty Outlook:

  • The Bank Nifty gained for the third consecutive week amid firm global cues and closed higher by 2.6% at 42132 levels. Decline in CPI inflation for March further boosted sentiment. The weekly price action formed a strong bull candle with a higher high-low signalling continuation of the up move.
  • The index has generated a breakout above last four-month declining channel signals end of corrective phase and opens upside towards 43000 levels in April 2023 being the 80% retracement of the entire decline (44151-38613).
  • Index after almost 3000 points up move in just three weeks has approached overbought territory raising probability of a temporary breather. However, this should not be constructed as negative instead dips should be used as a buying opportunity.
  • Key point to highlight is that the index for the first time since December has posted faster retracement of last major declining segment i.e., seven weeks decline (42015-38613) retraced in just three weeks signalling sign of turnaround on larger degree
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  • Bank Nifty continues to outperform the Nifty. The Bank Nifty/Nifty ratio line continues to trend higher and sustaining above the major breakout area signalling extended period of outperformance
  • The index has support at 41200 levels being the confluence of the 61.8% retracement of the last week up move (40727-42196) and rising demand line joining lows of the last three weeks
  • The weekly stochastic remain in uptrend and is seen sustaining above its three periods average thus supports the overall positive bias in the index

(Dharmesh Shah is Head Technical at ICICI Securities. Views expressed are author’s own.)