By Dharmesh Shah
Equity benchmark extended its winning streak over the fourth consecutive week as global macro improvement kept risk appetite intact, leading Nifty to close at a 4-month high at 17698, up 1.7%. While the broader market performed in tandem with the benchmark. Sectorally, financial, metal remained at forefront while FMCG, pharma took a breather
– Index started the week on a buoyant note and inched northward throughout the week. In the process, Nifty surpassed our intermediate target of 17500. The weekly price action formed a bull candle carrying higher higher-low, indicating acceleration of upward momentum
– We expect the Nifty to head towards 17900 levels this truncated week wherein the broader market expected to outperform. However, bouts of volatility after a 12% rally over the past four weeks (which hauled weekly stochastic oscillators in overbought conditions currently placed at 97) can not be ruled out. Therefore, one should adopt a buy on dips strategy as we believe strong support is placed at 17300. Our target of 17900 is based on 80% retracement of the entire decline from October 2021 to June low (18600-15200). The constructive bias is further validated by following observations:
A) Nifty and Nifty midcap index have registered a bullish golden crossover (50-day EMA crossing 200-day EMA). This is a positive development from a medium term perspective. Since 2008, in 8 out of 10 such instances Nifty has generated minimum 8% return in subsequent 3-4 months
B) Strength in Indian equities is well supported by strong correlation with Developed market indices. Last week, Nasdaq index and broader Russell 2000 index have registered a breakout from falling channel of past seven months with strong spurt in volume of advancing stocks, thus signalling end of corrective phase
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C) Percentage of stocks above 200 day EMA has risen to 46% against a reading of 30% two weeks back and lowest reading of 14% at June lows. Sequential improvement in breadth using long term indicator signifies broad based participation in rally
D) US dollar index has closed below the 50-day average (106) for the first time since January 2022 indicating loss of upward momentum. Follow through weakness would be positive for Emerging markets and Metals. Relative outperformance of Indian equities within EM space could get further leg up
– Sectorally, BFSI, IT, Auto, consumption, Capital goods, Metal sectors to remain in focus with midcaps outperforming large cap peers
– Our preferred Large caps are HDFC Bank, SBI, Infosys, Reliance Industries, Tata Motors, L&T, JSW Steel, Cipla while in midcaps we prefer Siemens, ABFRL, Bajaj Electricals, Vguard, Bank of Baroda, SAIL, Aarti Industries, Mahindra Holidays Resorts, KPIT Technologies, TCI, Apollo Tyres
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– The Nifty midcap index logged a resolute breakout from 10 months downward slanting channel encompassing corrective move since October 2021, indicating conclusion of corrective bias that augurs well for extension of ongoing rally.
– Structurally, the formation of higher high-low underpinned by broader market participation makes us confident to revise support base at 17300 as it is 38.2% retracement of most recent rally (16438-17719) coincided with the last week’s low of 17360
Bank Nifty Outlook
– The Bank Nifty gained for the fourth consecutive week amid firm global cues as the US dollar index declined on cooler-than-expected U.S. inflation data. The index closed at a five months high at 39042 levels, up by 2.9% on a weekly basis. The weekly price action formed a sizable bull candle which maintained higher high-low signaling continuation of the up move. In the process closed above 39000 levels for the first time since early February 2022
– Going ahead, we expect the index to maintain positive bias and head towards the psychological mark of 40000 in coming weeks being the 80% retracement of entire decline off October 2021 to June 2022 (41829-32290)
– 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 continues to remain in rising trend forming higher high-low and is seen sustaining above the recent falling supply breakout area joining highs since January 2021 highlighting strength and continuation of the outperformance
– Index after a sharp rally of more than 20% in the just eight weeks has approached overbought condition in the daily and weekly stochastic oscillator (currently placed at a reading of 95 and 96 respectively) indicating possibility of temporary breather at higher levels cannot be ruled out. We believe any retracement of the recent up move from here on would make the market healthy and provide incremental buying opportunity. However, only a decisive close below last Thursday gap area (38287-38648) would lead to a breather, else continuation of upward momentum
– The formation of higher high-low on the weekly chart makes us confident to revise the support base higher towards 37500 levels as it is the confluence of the last week low and 50% retracement of the last three weeks up move (36248-39088)
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.