Nifty to undergo consolidation in 18500-18000 range; Bank Nifty near overbought zone, gained 12% in 7 weeks

Nifty 50 has managed to retrace its 12 week decline (18,252-16,828) in just six weeks. The index is expected to go through a healthy consolidation.

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Bank Nifty successfully recouped its decline from last week and closed sharply higher by 2.7% at the 43,793 mark.

By Dharmesh Shah

The equity benchmark endured its northbound journey despite muted global cues. The Nifty gained 1.4% to settle the week at 18315. Broader market performed in tandem with the benchmark as Nifty midcap, small cap gained ~1%, each. Sectorally, auto, financials, consumption remained at the forefront while metal, pharma, PSU bank relatively underperformed.

Nifty 50 Technical Outlook

The strong opening for the week followed by range-bound activity in the subsequent sessions as the earning season progressed. As a result, weekly price action formed a bull candle carrying higher high-low, indicating continuance of positive bias. However, range bound activity in the fag end of the week, highlights dwindling upward momentum after >9% rally seen over past seven week’s, which hauled weekly stochastic oscillator in overbought conditions (placed at 90).

Going ahead, we expect Nifty to undergo healthy consolidation in the broader range of 18,500-18,000 with stock specific action as most large cap earnings are behind us.  In the process, we expect broader market to relatively outperform as Nifty midcap index is just shying away 2% from its All Time High. We expect, midcap index to eventually challenge life highs over next few weeks. Thus, focus should be on accumulating quality stocks on dips amid progression of earning season. Structurally, our positive bias remain intact based on following observations:

  1. The index has retraced 12 weeks decline (18,252-16,828) in just six weeks. Faster pace of retracement signifies structural turnaround
  2. The current rally is backed by week on week strong market breadth as the percentage of stocks above 200 days EMA for the Nifty 500 universe have jumped to 59% compared to last week’s reading of 52% which depicts broader market participation 
  3. On the macro front, benign industrial commodities, brent prices and prospects of further softening of yields domestically and globally would be key tailwinds for the Indian equities
  4. FIIs inflows have remained sturdy in May (Rs 18,000 crore so far) which is a key supporting factor for acceleration of structural uptrend ahead

Sectorally, we remain positive on BFSI, auto, IT, consumption. On stock front, in large cap Axis Bank, IndusIind Bank, Bajaj Finance, Havells, HCL Tech, M&M, Titan are in focus while in midcap Ashok Leyland, Bata India, IDFC First Bank, Rossari Bio, Kajaria Ceramics, Mayur Uniquoters, Timken remain in focus

The broader market indices continued their northbound journey while maintaining higher peak and trough, indicating robust price structure. Key point to highlight is that, The midcap index is within 2% vicinity of its All Time High. Thus, Mid-cap stocks should be in focus amid progression of the earning season. 

Structurally, formation of higher high-low on the weekly chart signifies elevated buying demand that makes us confident to revise support base at 18,000 as it is 50% retracement of current up move (17,554-18,390) coincided with current month’s low of 18,042.

Bank Nifty Outlook

The Bank Nifty recouped its last week decline and closed sharply higher by 2.7% at 43,793 levels. The US inflation fell below 5% for the first time in two years led to improved sentiment. The private banking stocks outperformed as the index closed with a healthy gain of 3.3% while the PSU banking stocks witnessed profit booking after recent strong up move. The weekly price action formed a bull candle with a higher high-low signaling continuation of the up move.

Index has approached overbought territory after rallying more than 12% in just seven weeks. Hence, healthy consolidation in the broad range of 44,500-42,500 is expected in the coming weeks amid stock specific action. 

Structurally, combination of faster retracement of last falling segment with monthly higher high-low signifies improvement in price structure and therefore supports buying dips strategy. On relative terms, Bank Nifty continues to outperform the Nifty. The Bank Nifty/Nifty ratio line continues to trend higher and maintain higher high-low signaling extended period of outperformance.  

The index has support at 42,500 levels being the confluence of the last two weeks lows and the 38.2% retracement of the recent up move (39,610-43,905). Weekly Stochastic is seen reacting lower from the extreme oversold territory, consolidation in the coming weeks will help the index to work off the overbought condition.

(Dharmesh Shah, Head – Technical, ICICIdirect. Views expressed are author’s own. Please consult your financial advisor before investing.)

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First published on: 15-05-2023 at 10:37 IST