Nifty support at 16100, buy dips to add quality stocks; monthly chart shows extended correction in Bank Nifty

Only a decisive close below 16100 would lead Nifty 50 index to extended correction towards the March low of 15700.

NSE Nifty, Bank Nifty
Key monitorable in coming weeks will be cool off in domestic and global volatility which has inverse correlation with equities. Image: Pixabay

By Dharmesh Shah 

Equity benchmarks concluded a volatile week on a negative note tracking global volatility. The Nifty ended the week at 16411, down 4%. Broader markets indices relatively underperformed the benchmark as Nifty midcap and small cap lost 4% and 6.5%, respectively. Sectorally, all major indices ended in red weighed by financials, auto, realty

NSE Nifty 50 technical outlook

The index started the truncated week with a negative gap and gradually drifted southward as an unscheduled rate hike announcement by RBI followed by Fed rate hike dented the market sentiment. As a result, contrary to our expectation Nifty breached key support of 16800 accelerating further decline amid weak global cues and spike in volatility. The weekly price action formed a sizable bear candle carrying lower high-low, indicating extended correction. 

Going forward, key support is placed at 16100 levels being 80% retracement of March rally. Only a decisive close below 16100 would lead Nifty 50 index to extended correction towards the March low of 15700. However, we observe that the past four weeks’ corrective move hauled daily and weekly stochastic oscillators in extreme oversold territory (currently placed at 8 and 16, respectively). In earlier occasions, during CY18-20, after approaching such lower reading below 20, markets have witnessed technical pullback. 

Thus, we advise traders to refrain from creating aggressive short positions in the current highly volatile scenario. Instead, one should capitalize dips to construct portfolios in quality stocks in a staggered manner. Meanwhile, immediate upsides are capped at breakdown area of 16800

Historically, over the past two decades, on 16 out of 20 occasions despite a transitory breach (not greater than 5%) of the 52-week EMA (currently 16600) index has generated decent returns in subsequent 3 month and 6 months. In the current scenario 5% from 200 days EMA will mature at 15700.

Key monitorable in coming weeks will be cool off in domestic and global volatility which has inverse correlation with equities. Thus cool off in volatility coupled with oversold conditions will pave the way for technical pullback.  

On the sectoral front, BFSI, Telecom, IT sectors offer favourable risk-reward proposition

The broader market indices behaved in tandem with benchmark. Currently, Nifty midcap, Nifty small cap indices are hovering around 52 weeks EMA. We believe prolonged consolidation from hereon would help the weekly stochastic oscillator to cool off amid ongoing Q4FY22 earning season. Going ahead, the formation of higher high-low on the weekly chart would confirm pause in downward momentum

Nifty Chart

Bank Nifty Outlook

The Nifty Bank index witnessed sharp decline and closed lower by 4% last week amid weak global cues and unscheduled rate hike by RBI. Index contrary to our expectations, breached the support area of 35000 and in the weekly price action formed a sizable bear candle with a lower high-low signaling continuation of the corrective decline.

Key support for the index is placed at 33500 levels being the 80% retracement of the entire March up move. Only a decisive close below 33500 would lead to extended correction towards the March low of 32155. Immediate upsides are capped at 36000 levels.

Index has stiff hurdle around 36000 levels being the confluence of last Thursday high and the 38.2% retracement of current decline (38765-34353).

The formation of lower high-low on the monthly chart signifies extended correction. However, the index has witnessed a shallow retracement of its preceding up move and has already taken five weeks to retrace just 61.8% of its preceding four weeks up move (32156-38765). A shallow retracement signals a higher base formation. The index has support around 33500 levels as it is confluence of:

a) 80% retracement of the entire March 2022 up move (32155-38765) placed at 33500 levels

b) bullish gap area of 10th March 2022 is also placed around 33700 levels

Among the oscillators the weekly stochastic is currently approaching oversold territory with a reading of 20 signaling a pullback likely in the coming weeks

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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