By Dharmesh Shah
The Nifty started the expiry week with a negative gap (17756-17682) and witnessed a range bound activity. The weekly price action resulted in a bear candle carrying lower high-low for the first time since June 2022, indicating profit booking after a 13% rally seen over the past five weeks that led prices to an overbought trajectory. In the process, Nifty midcap and small caps remained in limelight as they relatively outperformed the benchmark. In the holiday truncated week, we expect healthy retracement towards 17200 levels which should not be construed as a negative rather capitalize dip as a buying opportunity. Ongoing consolidation in the broad range of 17200-17800 after sharp rally would help oscillators to cool off and set stage for next leg of up move, hence one should adopt strategy of buying dips in quality companies to ride structural uptrend.
In the meantime, we expect the broader market to endure their relative outperformance. Our structural positive stance is further validated by following observations:
a) Nifty has surpassed major downward trend line well supported by thrust in advancing stocks volume, signalling end of eight-month corrective phase
b) In each of six instances since 2008, reading below 15 in percentage of stocks above 200 DMA (Nifty 500 universe) led to durable bottom, followed by new highs on Nifty. We expect same rhythm to be maintained this time as the indicator seen sequential improvement with current reading of 50 after bottoming out during June 2022 with a reading of 14, indicating broad based participation
c) Nifty registered a bullish golden crossover in August (50-DEMA crossing above 200-DEMA) implying a major shift of momentum in favour of the bulls from a medium term perspective. In last decade, in eight out of 10 such instances, the Nifty has generated average 11% return in subsequent three to four months
d) India VIX has remained unchanged for the week around 18 ahead of event indicating that market participants are not assessing any major short term risk
e) Strength in domestic equities is well supported by positive correlation with US indices, that have signalled end of corrective phase with breakout above eight month falling channel
On the broader market front key development observed during last week has been sharp improvement in relative ratio of Nifty MidSmall 400 index against Nifty along with falling channel breakout in Nifty small cap index. Strong thrust in relative ratio signal strong outperformance in broader market space ahead.
Structurally, we expect relative outperformance of BFSI, Auto, Capital goods, PSU and consumption. Preferred large caps: Reliance Industries, SBI, Titan, Bajaj finance, Tata Motors, L&T while preferred midcaps are City Union Bank, Indian Bank, Mahindra CIE, Indian Hotels, Action Construction, TCI Express, Cochin Shipyard, PNC Infra, Bajaj Electricals, Prestige Estates, KPIT Technologies
The prolongation of consolidation would make the market healthy by cooling off overbought conditions (currently weekly stochastic cooled off to 87 from the previous week’s reading of 97). Hence, we retain the support base at 17200 as it is 38.2% retracement of July-August rally (15858-17992)
Bank Nifty Outlook
The Bank Nifty consolidated in a range and closed on a flat note during last week amid mixed global cues. The PSU banking stocks outperformed with a gain of 4.5% on a weekly basis. The Bank Nifty closed the week on a flat note at 38987 levels. The weekly price action formed a high wave candle with a small real body and long shadows in either direction signaling consolidation after the recent strong up move of 15% in the preceding five weeks
Going ahead in this truncated week we expect the index to continue with its current consolidation in the broad range of 38000-39800 with midcap and PSU banking stocks outperforming. Consequently, this will help the index to cool off overbought conditions (currently weekly stochastic cooled off to 87 from 95 levels seen during last week)
We believe the current consolidation should not be seen as negative instead would make the market healthy and provides incremental buying opportunity in quality banking stocks from medium term prospective
Bank Nifty continues to relatively outperformed the benchmark index in the last few quarters as can be seen in the Bank Nifty/Nifty ratio chart. Within the banking stocks PSU banking stocks has been resilient and showing relative strength which we expect to outperform going forward
The index has immediate support around 38000 levels as it is the confluence of the last week low and the 50% retracement of the recent up move (36248-39759)
Dharmesh Shah is the Head – Technical at ICICI Direct. Please consult your financial advisor before investing.)
ICICI Securities Limited is a SEBI registered Research Analyst having registration no. INH000000990. It is confirmed that the Research Analyst or his relatives or I-Sec do not have actual/beneficial ownership of 1% or more securities of the subject company, at the end of 21/01/2022 or have no other financial interest and do not have any material conflict of interest. I-Sec or its associates might have received any compensation towards merchant banking/ broking services from the subject companies mentioned as clients in preceding 12 months.