Nifty may head to 18300 this month, support at 16800, buy SBI, Kotak Bank; use dips in Bank Nifty to buy | The Financial Express

Nifty may head to 18300 this month, support at 16800, buy SBI, Kotak Bank; use dips in Bank Nifty to buy

This week, midcap and small caps are expected to relatively outperform while Nifty undergoes healthy consolidation in the range of 17200-17800

Nifty may head to 18300 this month, support at 16800, buy SBI, Kotak Bank; use dips in Bank Nifty to buy
Going ahead Bank Nifty is expected to continue with its healthy consolidation and gradually head towards 40800 in the month of September. Image: Pixabay

By Dharmesh Shah 

Indian equities outperformed global peers as sharp decline in Brent crude prices and industrial commodities supported sentiments. Nifty Midcap and Small cap indices outshined with 0.9% and 0.3% gain while Nifty closed the week marginally lower at 17540. Sectorally, Realty, Auto, Capital goods and Banking relatively outperformed with 2%-3% gains  

Technical Outlook

The Nifty underwent healthy consolidation in the face of global volatility last week on expected lines cooling off from an overbought trajectory after sharp 13% rally in July and early August. The price action resulted in a Bull candle as Monday’s large gap down attracted buying demand in the vicinity of 17200 levels

Going forward, we expect the Nifty to undergo healthy consolidation and gradually head towards 18300 in the month of September while strong support exists at 16800 which we do not expect to break. We recommend to buy dips to construct portfolio of quality companies

This week, midcap and small caps are expected to relatively outperform while Nifty undergoes healthy consolidation in the range of 17200-17800

Key observations from last week are as follows:

Nifty small cap index has given a conclusive breakout from 8 month falling channel signalling end of corrective phase. Breakout is well supported by sequential improvement in market breadth as percentage of stocks above long term 200day EMA rose from end July reading of 51% to 60% indicating broad based nature of rally

Brent crude has given a breakdown below the key support line since CY20 lows. We expect a decisive breach below $92 to accelerate downward momentum towards $86 in coming weeks

Our structural positive stance is further validated by following observations:

a) Nifty has given a breakout from falling channel of past eight months signalling end of corrective phase and resumption of uptrend

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

Structurally, we expect BFSI, Realty, Auto, Capital goods, PSU and consumption to relatively outperform

Our preferred large caps are SBI, Kotak Bank, Asian Paints, Tata Consumer, M&M, L&T, DLF. while preferred midcaps are Bajaj Electricals, Supreme Industries, M&M Finance Jamna Auto, Lemon Tree, JK Lakshmi Cement, Ador Welding, Concor, Garden Reach shipbuilder

The prolongation of consolidation would make the market healthy by cooling off overbought conditions (currently weekly stochastic cooled off to 73 from the previous week’s reading of 87). We retain the support base at 16800 as it is 50% retracement of July-August rally (15858-17992) and value of rising 200-day EMA at 16741

Bank Nifty Outlook

The Bank Nifty traded with positive bias amid higher volatility and closed the week up by 1.1% at 39421 levels amid sharp decline in Brent crude prices and industrial commodities. The weekly price action formed a bull candle which mostly remained contained inside previous week price range signaling consolidation for the third week after the recent strong up move of 15% in the preceding five weeks  

Going ahead we expect the index to continue with its healthy consolidation and gradually head towards 40800 in the month of September. In the coming week it is likely to consolidate in the broad range of 39800-38000 with PSU banking stocks continuing with its outperformance. Consequently, this will help the index to cool off overbought conditions (currently weekly stochastic cooled off to 82 from recent high of 95)

Structurally the recent rally from June lows of 32290 is strongest in magnitude since October 2021 while declines are smaller and short lived indicating an improving price structure. Hence, we view ongoing consolidation as healthy retracement that will make larger trends healthier and set the stage for the next leg of up move. Therefore, we recommend to use dips amid ongoing consolidation as incremental buying opportunity

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 support around 38000 levels as it is the confluence of the last two weeks almost identical low and the 38.2% retracement of the previous major up move (34464-39759).

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.

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