By Dharmesh Shah
NSE Nifty 50 index started the previous week on a subdued note, however, buying demand emerged in the vicinity of 200 days EMA that helped index to recoup intra-week losses and subsequently surpassed our intermediate target of 17000. The weekly price action formed a bull candle carrying a higher low over the sixth consecutive week, highlighting acceleration of upward momentum with four unfilled gaps on the upside over the past two weeks. As a result, after 9 months’ index closed above the previous month’s high.
The current rally of 13% is larger in magnitude since April 2022. Consequently, rallies are now getting bigger along with shallow correction, indicating structural improvement that makes us confident to upgrade target to 17500 in the month of August while 16700 remains immediate support as it is 61.8% retracement of current week’s rally (16438-17172) coincided with the positive gap recorded post U.S. Fed meet outcome on 28th July 2022 (16641-16746). Hence, temporary breathers from hereon should be utilised as incremental buying opportunities. Our constructive bias is further validated by following observations:
a) Since October 2021 peak of 18600, on two occasions post falling channel breakout Nifty has retraced 80% of preceding corrective phase. At current juncture, similar breakout has panned out and we expect Nifty to maintain the same rhythm and head towards 17500 being 80% retracement of two-month decline (18100-15200)
b) Long term sentiment indicator: Since 2008, on six occasions index has formed a durable bottom after the percentage of stocks above 200 DMA (Nifty 500 universe) has touched the extreme low reading below 15. Subsequent rallies in each of these instances measured minimum 20% from lows
c) The fall in India VIX highlights improvement in market sentiment that augurs well for extension of ongoing rally
Sectorally, BFSI, IT which contribute around 50% weight in index are expected to lead with strong support from Auto, Capital goods which are in structural uptrend. Our preferred picks in large caps are SBI, Axis Bank, TCS, Reliance Industries, L&T, Sun Pharma, Tata Motors, Tata Steel, while in midcaps we like Cyient, Sequent Scientific, Sundaram Finance, Kajaria Ceramics, Bharat Forge, Brigade Enterprises, KSB, Kewal Kiran Clothing, Allcargo logistics, Bharat Dynamics, Caplin Points.
The Nifty midcap and small cap indices mirrored the move in benchmark and staged a decent pullback after approaching price wise maturity of 25% and 40%, respectively. Key point to highlight is that, 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 80% indicating broad based nature of rally that bodes well for durability of ongoing pullback and paves the way for 7-8% up move, respectively
Bank Nifty Outlook
The Bank Nifty gained for the second consecutive week and closed higher by 2% at 37491 levels amid firm global cues, as softening of crude oil and industrial commodities helped to cool off rising inflation concerns. The weekly price action formed a bull candle which maintained higher high-low signaling continuation of the up move. The index in the process also closed above the falling supply line joining the highs of October 2021 and April 2022 highlighting strength and acceleration of the upward momentum.
Going ahead we expect the index to maintain positive bias as the rallies are getting bigger in magnitude with shallow correction indicating structural improvement that makes us confident to upgrade target to 38700 levels in the coming weeks being the confluence of high of April 2022 and the 61.8% retracement of the entire decline (41829-32155)
Bank Nifty has relatively outperformed the benchmark index during the market correction and the subsequent pullback as can be seen in the Bank Nifty/Nifty ratio chart. It has registered a breakout above the falling supply line joining highs since January 2021 highlighting strength and continuation of the outperformance
Bouts of volatility on account of the volatile global cues cannot be ruled out. However, only a decisive close below last Thursday’s gap area (36808-37028) 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
The formation of higher high-low on the weekly chart makes us confident to revise the support base higher towards 36000 levels as it is the confluence of the recent breakout area and the 50% retracement of the current up move (34463-37754)
(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.