Both Nifty and Sensex are off their lifetime highs and have witnessed nearly 2.5% correction this week. Are we done, or do you expect further declines?
The benchmark index Nifty marked a high of 22,775 on April 10, 2024, and thereafter, it has witnessed sharp correction of nearly 1000 points in just 6 trading sessions. During this corrective phase, the index slipped below its rising channel on Friday. However, it found support near a previous swing low of 21,710, which was formed in the month of March 2024 and staged a strong recovery thereafter to once again close within the rising channel. In an impressive turnaround, the index not only negated Friday’s downside gap but also retraced over 50% of Thursday’s candle.
This resurgence led to the formation of a piercing line candlestick pattern on the daily chart. The piercing line candlestick pattern is considered to be a bullish reversal pattern and usually occurs at the bottom of a downtrend. Most noteworthy, this pattern emerged near a critical support zone, amplifying its potential significance. The support zone was defined by 100-day SMA level (21,729) which also coincides with 23.6% Fibonacci retracement level of its prior upward rally from the lows of 18,837 (October 2023) to the all-time high of 22,775.
In addition to the bullish formation observed, the index has successfully reclaimed its 50-day EMA level of 22,110. Particularly notable is the daily Relative Strength Index (RSI), which has found support around the 40-42 zone and has experienced a significant rebound. It’s worth highlighting that throughout this calendar year, this zone has consistently served as a robust support level for the RSI. Furthermore, the daily stochastic indicator has given a bullish crossover, which indicates limited downside.
The BSE Sensex has mirrored a similar chart structure, finding stability near its 100-day SMA level (71,868) last Friday, followed by a strong recovery. The emergence of a piercing line pattern on the daily timeframe hints at a potential slowdown in downward momentum for the short term. The momentum indicators and oscillators are also supporting the same phenomenon.
What triggers do you see this week apart from earnings and what levels should one watch out for, in Nifty and Bank Nifty?
Apart from earnings of key large-caps such as Reliance, HUL, Bajaj Finance, HCL Tech and Maruti amongst key large-caps, it’s crucial to monitor the ongoing geopolitical developments in the Middle East between Iran and Israel as it has the potential to trigger significant upside risks to commodity prices, including crude oil. Notably, Iran, currently representing 3.5% of global oil production, adds an important dynamic to this scenario.
Further, we need to keep a close eye on the volatility index, India VIX, as it has surged by nearly 17% in the last week. On Friday, it has given the highest closing in the last 16 trading sessions, and it has surged above its short and long-term moving averages. Key Level to watch out on India VIX would be 15 levels as a sustained rise above 15 levels would lead to acceleration of the current profit booking move & would even imply traders to exercise further caution towards leveraged positions.
Talking about Nifty levels, the zone of 21,800-21,750 will act as a crucial support for the index. As long as this support zone holds, the index is likely to witness pullback rally up to the level of 22,350-22,400, followed by 22,600 in the short term. While, on the downside, any sustainable move below the level of 21750 will lead to an extension of correction up to the level of 21,450-21,300 in the short term.
In the case of Bank Nifty, the range between 46,600-46,800 is expected to serve as a critical support zone. As long as this support zone remains intact, there’s potential for a pullback rally towards levels around 48,200, with further upside targets near 48800 in the short term. Conversely, if the price sustains a decline below the 46,600 level, it’s likely to resume its downward trajectory towards 46,000-45,700.
What is your assessment of the earnings so far and your advice to investors on stocks whose results have been declared while those who will announce it this week like Reliance Industries (RIL), Tata Consumer Products, Axis Bank, Bajaj Finance and others?
While within the IT Sector, TCS numbers have been inline and Infosys numbers have been weaker, the management continues to be cautiously optimistic over sector outlook amid a challenging macro environment. We prefer TCS over Infosys from a medium-term perspective.
Within Auto, Bajaj Auto’s quarterly performance has been better than expectations on account of a strong demand environment, while a slew of new launches continues to be supportive for the stock.
We expect Reliance, Bajaj Finance and Maruti to announce strong numbers, while Hindustan Unilever and Axis Bank could deliver a weak set of numbers.
From a technical standpoint, Maruti Suzuki, RIL, Tata Consumer Products, and Bajaj Finance are currently trading above both their short and long-term moving averages, signaling bullish sentiment in these stocks. Conversely, HUL & Axis Bank is trading below its short and long-term moving averages, suggesting a sideways to bearish outlook. Although Axis Bank experienced a minor rebound on Friday, any sustained movement below the level of Rs 995-Rs 990 could trigger renewed selling pressure in the stock.
Most sectors performed badly this week but the notable laggards were IT, PSU Banks and Pharma. What should be the strategy to trade in these sectors and are there specific stocks where you see opportunity?
Nifty IT has strongly underperformed the frontline indices for the last couple of weeks and is currently trading below its 20, 50, 100, and 200-day EMA level. Technical indicators also suggest a negative outlook. Among the constituents of Nifty IT, none of the stock is trading above its 20, 50, and 100-day EMA level. While only 40% stocks were trading above their 200-day EMA level. This clearly indicates that the internal strength of the index has weakened significantly. Hence, we recommend avoiding IT space for now and any pullback we should utilize to reduce leverage, if any.
Nifty Pharma which was in a strong uptrend between March 2023 and March 2024 is witnessing consolidation with a negative bias where the Index has currently slipped below its 20 and 50-day EMA level implying expectations of continuation of underperformance from a short-term perspective. It is likely to test the level of 18,200, followed by 18,000 in the short term. Among the constituents of Nifty Pharma, only 35% stocks are trading above their 20-day EMA level. Hence, we recommend avoiding Pharma space for now from a trading perspective.
The Nifty PSU Bank index has taken support near 6,770 level and witnessed pullback on Friday and as long as it is trading above this level, it is likely to witness pullback rally up to the level of 7,200 in the short term. Any sustainable move below 6,770 will lead to resumption in its southward journey. We feel stocks such as PNB and Canara Bank could witness an outperformance over other PSU banks.
It was being perceived that the broader markets have got over the Sebi warnings of froth. Do you see this week’s correction in mid and small caps as a result of overall pessimism that prevailed during the week or would you recommend caution?
rom a technical perspective, the Nifty Small Cap 100 index is exhibiting strong outperformance compared to frontline indices. While Nifty has experienced a decline of nearly 3% from its recent highs, the Nifty Small Cap 100 is down by only 2.31%, indicating better relative strength. Additionally, the ratio chart of the Small Cap index to the Nifty displays a sequence of higher highs and higher lows, further confirming this trend of outperformance.
Moreover, the Nifty Small Cap index is trading above both its short and long-term moving averages, signaling investor confidence and a risk-on sentiment in the small-cap space. Given these factors, we anticipate this trend to persist in the next couple of trading sessions, with continued strength in the Nifty Small Cap segment.
The 20 EMA zone of 15,900-16,000 would be a key support zone for the Nifty Small Cap Index and till the time Index holds this support, it could continue heading higher up to 16,600-16,800 in the coming weeks.
Talking about the Nifty Mid Cap index, as long as it is trading above the zone of 48,000-47,900, it is likely to consolidate between with a positive bias. Hence, it’s prudent for investors to remain extremely choosy & only focus on stock-specific opportunities with strong fundamentals within the Mid and Small Cap sectors in the forthcoming trading sessions.
General elections have started so what is your expectation from the markets over the next one and half months and which themes are likely to remain in action?
We anticipate that as long as the Nifty maintains its position above the 21,700-21,750 range, the broader positive structure is intact and it is likely to sustain its upward trajectory and trade with a positive bias in the short term. We suggest focusing on individual stock opportunities over the next two months to capitalize on potential market movements. Sectors such as private banking, oil & gas, power, defense, metal, automobile, and CPSE space are displaying higher relative strength and are likely to outperform in the next couple of weeks.
The top gainers this week have been Just Dial, Exide Industries and Elecon while SPARC, Tata Communications and Max Health have been among major laggards. What should investors do with them?
Just Dial and Elecon have given a fresh breakout on a weekly scale backed by robust volume activity. In addition, the momentum indicators and oscillators also support the overall bullish chart structure and hence, we recommend accumulating these stocks at the current market price from a short to medium term perspective.
Exide Industries has witnessed minor profit booking after a sharp upside rally. However, we believe it is likely to resume its northward journey if it sustains above Rs 470 level.
We recommend avoiding SPARC, Tata Communications, and Max health for now as they are in a strong downtrend.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)