Nifty to prolong ongoing consolidation in 18500-18000 range; Bank Nifty key support placed at 42700 level

The NSE Nifty 50 is expected to prolong the ongoing consolidation in the 18500-18000 range due the monthly derivative expiry week.

Share market outlook
Bank Nifty is likely to consolidate and form a base this week due to higher volatility on account of the monthly expiry.

By Dharmesh Shah

The equity benchmark snapped three weeks’ winning streak and settled the previous volatile week on a subdued note. The Nifty settled the week at 18203, down 0.6%. In the process, the broader market relatively outperformed as Nifty midcap, and small-cap gained 0.2% and 0.85%, each. Sectorally, IT, financials, and realty relatively outperformed while pharma, energy, and metal relatively underperformed.

Technical Outlook

The Nifty pared initial gains after approaching our target of 18500 on Friday. Subsequently, buying demand from the lower band of consolidation placed around 18000 helped the index to recover some of its intra-week losses. As a result, our buy-on-dips strategy fared well. The weekly price action resulted into high wave candlestick pattern carrying small real body with shadows on either side, indicating elevated volatility. In the process, stock-specific action prevailed amid the progression of earning season.

Nifty chart

Going ahead, we expect Nifty to prolong the ongoing consolidation in the 18500-18000 range amid the monthly derivative expiry week. Structurally, this consolidation will help the index to form a higher base. In the process, we expect small cap space to witness catch up activity. Thus, buy on dips would continue to be the prudent strategy to adopt. Structurally, our positive stance is further validated by the following observations:

  • The emergence of buying demand from the lower band of consolidation (18000) coincided with 20 days of EMA, which signifies a robust price structure.
  • The Bank Nifty has shown relative outperformance and maintained a higher high-low at ALL Time High. The resilience of Bank Nifty (which carries 38% weightage in Nifty) displays inherent strength. 
  • We expect Nifty small-cap space to witness catch-up activity as many small-cap stocks which are not part of the small-cap index are coming out of large consolidations. The highlighting point is that the Nifty midcap index is just 2% away from its all-time high whereas the Nifty small cap index is still 18% away. Thus, quality small-cap stocks should be in focus.
  • FII’s inflows have remained sturdy in May which is a key supporting factor for the acceleration of the structural uptrend ahead.
  • Sectorally, we remain positive on BFSI, Auto, IT and Infrastructure.
  • On the stock front, large-cap Axis Bank, Infosys, Bharti Airtel, United Spirits, Tata Motors, DLF, and Marico are in focus while in midcap Sundaram Finance, AIA Engineering, Mahindra CIE, Coforge, Exide Industries, PCBL, Kajaria Ceramics, PNC Infra, Elgi Equipment remain in focus.
  • The broader market indices continued with their relative outperformance while maintaining higher peaks and troughs, indicating elevated buying demand. Thus, broader market should be in focus as we approach the fag end of the earning season.
  • Structurally, the formation of a higher high-low on the monthly chart signifies elevated buying demand that makes us confident of keeping support base at 17800 as it is a 38.2% retracement of the Mar-May up move (16828-18458) coincided with 50 days EMA placed at 17873.

Bank Nifty Outlook

The Bank Nifty started the previous week on a positive note and tested all-time high (44151) on Monday’s session. The index thereafter consolidated in a narrow range for the rest of the week and closed marginally higher by 0.4%at 43969. The weekly price action formed a high wave candle signalling pause after a recent strong up move of 15% points in the last eight weeks.

Bank Nifty chart

Going ahead, the index is likely to consolidate and form a base this week amid higher volatility on account of the monthly expiry. Only a firm closing above the all-time high (44151) will open further upside towards 44900 levels in the coming weeks. However, the up move towards 44900 would be in a non-linear manner as bouts of the volatility after the last two months’ strong up move cannot be ruled out, hence dips should be used as a buying opportunity.

  • A key observation in the weekly chart of Bank Nifty is that it has witnessed a faster retracement of the 14-week decline (44151-38613) from Dec 22-Mar 23 in just seven weeks. Faster retracement in just half the time interval indicates structural improvement from a medium-term perspective.
  • In relative terms, Bank Nifty continues to outperform the Nifty. The Bank Nifty/Nifty ratio line continues to trend higher and maintain higher high-low signalling extended period of outperformance.
  • The index has key support at 42700 levels being the confluence of the recent low and the 38.2% retracement of the recent up move (39610-44151).
  • Weekly Stochastic is seen reacting lower from the oversold territory, consolidation in the coming weeks will help the index to cool off the overbought condition.

(Dharmesh Shah is Head Technical at ICICI Securities Ltd. Views expressed are author’s own.)

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First published on: 22-05-2023 at 13:14 IST