By Dharmesh Shah
Equity benchmarks snapped four weeks losing streak and settled the range bound week on a subdued note. The Nifty concluded the week at 18,308, down 0.2%. However, broader markets relatively underperformed the benchmark as the Nifty mid-cap, small-cap lost over 1% each. Sectorally, barring financials all other indices ended in red weighed by consumption, auto.
- The Nifty witnessed a range bound activity wherein it oscillated within merely 200 points range throughout the week. The weekly price action formed a small bear candle carrying a higher high-low, indicating temporary breather as profit booking set in led by anxiety near all-time highs.
- We expect Nifty to undergo healthy consolidation which will help to cool off the overbought condition (weekly stochastics placed at 95) formed due to past four week’s 9% rally and form a higher base above key support of 17,800 mark which will eventually pave the way to challenge life highs of 18,600 in coming weeks. Thus, extended breather from here on should be capitalized on as incremental buying opportunity. Our positive stance is further validated by following observations:
- Index rallies are getting bigger with shallow retracements after breakout from past one year down trending channel indicating inherent strength
- Sharp reversals in Dollar index, US yields have helped to taper down anxiety around further aggressive rate hikes which is supportive for equities globally and also domestically
- Brent crude prices (-7% for week) continue their down trend in a well channeled manner which is supportive for Indian equities
- India VIX continued its lower high-low for seventh week and stayed at multi month low indicating low risk perception amongst participants
- On the sectoral front, we remain positive on BFSI, Telecom, Capital goods, PSU, IT which can contribute to upsides. Key point to highlight is that, BSE PSU index has given a resolute breakout from 11-year range indicating structural turnaround. Historically sectors coming out of multiyear underperformance, outperform post breakout for next few years.
- On the stock front, our preferred large caps are Kotak Mahindra Bank, HDFC Bank, HCL Tech, Reliance Industries, L&T, Ambuja Cement, Ultratech Cement, Hindalco while in midcaps we prefer Coforge, HEG, JK Cement, Texmaco Rail, Mahindra CIE, HAL, Redington, SKF India.
- Structurally, the formation of higher peak and trough signifies elevated buying demand that makes us confident to retain support base at 17800 as it is 38.2% retracement of past four week’s rally 16950-18442 coincided with 50 days EMA.
- Over past couple of weeks, mid-cap and small-cap indices have lagged large caps. Structurally, they are undergoing higher base formation above their 100 and 200 day averages. Both indices have retraced their 11-week rally from June lows by just 38% in equal time. Shallow retracement indicates inherent strength and we expect both indices to resume uptrend in December as they approach price/time maturity of correction.
Bank Nifty Outlook:
- The Bank Nifty gained for the seventh week in a row and scaled a fresh all all-time high (42,622) during last week. The index closed the week at 42,437 levels up by 0.7%. The weekly price action formed a small bull candle with shadows in either direction signaling consolidation with positive bias after strong up move of more than 13% in the last seven weeks.
- We expect the index to undergo healthy consolidation and form a higher base above the breakout area of 41,500 after the recent strong up move which has led to weekly stochastic in overbought zone (92). We believe dips should be used as an incremental buying opportunity for up move towards 43,500 levels in the coming weeks being the 138.2% external retracement of the recent breather (41,840-37,386).
- Bank Nifty/Nifty ratio line is in steady up trend and is seen rebounding after retesting its 15 months range breakout area, indicating strength and continuation of the outperformance.
- Structurally, in the Bank Nifty rallies are getting faster and stronger while corrections are shallow, underpinning inherent strength highlighting robust price structure.
- The Bank Nifty has support at 41,000-41,500 mark being the confluence of the (a) 23.6% retracement of the last seven weeks up move (37,387-42,622) placed at 41,380 (b) the 10 weeks EMA currently placed at 42,800 levels (c) the upper band of the recent eight weeks range breakout area placed around 41,500 levels.
Bank Nifty Chart
(Dharmesh Shah is the Head – Technical at ICICI Securities Limited. The views expressed are author’s own.)