By Dharmesh Shah
Equity benchmarks edged higher tracking positive global cues. The Nifty settled the previous week at 16719, up 4.2%. Broader markets performed in tandem with benchmark. Sectorally, barring pharma, all other indices ended in green led by financials, IT, metal.
In line with our view, Nifty resolved higher and approached our target of 16600 (as discussed in July month strategy). The index witnessed a gap up opening and gradually inched northward during the week. The weekly price action formed a sizable bull candle carrying higher high-low, indicating acceleration of upward momentum. As a result, index is sustaining well above its 200 days EMA, indicating rejuvenation of upward momentum
The current 10% rally is longer in magnitude compared to intermediate rallies off April high of 18114. The elongation of rallies supported by across sector participation signifies inherent strength that makes us confident to revise target to the psychological mark of 17000 for coming weeks as it is 61.8% retracement of April-June decline (18114-15183). However, we believe, the move towards 17000 would not be in a linear manner as bouts of volatility cannot be ruled out owing to U.S Fed meet and monthly expiry this week amid overbought conditions of daily stochastic oscillator (currently placed at 95). Thus, temporary breather from hereon should not be construed as negative instead dips should be capitalised as incremental buying opportunity
Sectorally, BFSI, Auto and Capital goods remain at the leadership role given their outperformance while IT, metal and Real estate are expected to witness technical pull back and offer favourable risk-reward
In large caps we prefer Housing Development Finance Corporation (HDFC), State Bank of India (SBI), Bajaj Finance, Tata Consultancy Services (TCS), L&T, Maruti Suzuki India, Marico, Cipla, Hindalco, Titan Company while in midcaps we like Coforge, Persistent Systems, Phoenix Mills, Caplin points, Thermax, Mahindra Holidays, Shoppers Stop, Coromandel International, Federal Bank, TTK Prestige
Structurally, the breadth indicator, measured by percentage of stocks above 50 day moving average have jumped from 22% at the beginning of July to current reading of 77% indicating broad based nature of rally that augurs well for durability of ongoing up move which makes us confident to revise support base upward at 16300 as it is confluence of:
a) 50% retracement of past five days move (15858-16752)
b) as per change of polarity concept past two weeks identical high of 16275 would now act as key support
On the broader market front, the benchmark index Nifty and midcap index have approached their 200 days EMA, however small cap index is still 6% away from its 200 days EMA. Thus, we expect catch up activity to be seen in the broader market. Hence, focus should be on accumulating quality mid and small caps amid ongoing Q1FY23 earning season
Bank Nifty Outlook
The Bank Nifty staged a strong comeback after last week’s breather and closed the week higher by 5.9% at 36739 levels. The weekly price action formed a strong bull candle which maintained higher high-low and closed firmly above the 200 days EMA (currently at 35424) highlighting strength and continuation of the current up move.
The rallies are getting bigger in magnitude while declines are smaller and short lived indicating improving price structure, which makes us confident to revise target to 37500 levels in the coming weeks being the 80% retracement of the previous major decline (38765-32290).
The up move towards 37500 levels is likely to be in a non-linear manner, bouts of volatility owing to U.S Fed meet and monthly expiry in coming week cannot be ruled out. However, only a decisive close below previous session low (36286) would lead to a breather, else continuation of upward momentum. However, temporary breather from hereon should not be construed as negative instead dips should be capitalised as incremental buying opportunity.
Key observation in the recent market correction and during the last five-week pullback is that the Bank Nifty is relatively outperforming the Nifty. It is also highlighted in the Bank Nifty/Nifty ratio chart as it is seen breaking above the falling supply line joining recent highs highlighting strength and continuation of the current outperformance.
The formation of higher high-low on the weekly chart makes us confident to revise the support base higher towards 35400 levels as it is the confluence of the 200 days EMA and the 61.8% retracement of the last week’s up move (34463-36823). Among the oscillators, the weekly stochastic remains in a strong up trend thus supports the overall positive bias in the index.
(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 17/06/2022 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.