By Dharmesh Shah
Equity benchmarks extended losses following weak global signals after the outcome of the US FOMC meeting last week. The NSE Nifty 50 index ended the week at 15,294 down 5.6%. Broader market indices extended the weakness as the Nifty midcap and small cap indices lost around 6% and 8%, respectively. Sector-wise, all major indexes ended in the red, weighted by IT, metals and financials.
Nifty 50 Technical Outlook
The index opened lower (16202-15877) and drifted south as the week progressed. Selling pressure accelerated on the break of the key support at 15700 held for the past three months. The weekly price action has formed a significant bearish candle bearing a lower high-low, indicating accelerating downward momentum. As a result, the daily Stochastic Oscillator approached oversold territory with a reading of 8. Meanwhile, the Indian VIX regained momentum after four weeks of declines.
The breakdown below key support at 15700 as well as selling across the sector indicates an extended corrective phase towards the next major support area of 14800-14600 in the coming weeks as it is at the confluence of:
a) 80% retracement of the CY-21 rally (13596-18604), at 14600
b) implied target of recent consolidation breakdown 16800-15700, is placed at 14600
However, the extreme bearish readings on the momentum and sentiment indicators suggest that taking aggressive short positions at lower levels should be avoided as technical pullbacks cannot be ruled out. Going forward, for a significant pullback to materialize, the index must form a higher high-low on a weekly timeframe with an improvement in market breadth. In the process, 15800 will act as key resistance on the upside.
Structurally, the sentiment indicators are approaching their bearish extremes. Historically, these extreme bearish conditions possess the distinctive nature of a technical pullback in the following weeks. The main observations on the sentiment indicators are as follows:
a) Historically, reading the percentage of stocks above 200 DMA below 15 signifies extreme pessimism in the markets. From a behavioral perspective, such levels are produced when sentiments are bearish and participation becomes low, leading to a sustainable bottom formation in a mid-term perspective. Therefore, the current reading of 14 (which is the lowest since March 2020) signifies an impending pullback in the following weeks.
b) Empirically, the net advance – decline below -450 means market sentiment is at its bearish extreme. The current week we have seen a reading of -459 indicating extreme oversold market conditions and an impending pullback
From a medium-term perspective, now is an opportune time to build a laddered portfolio with a focus on large caps. We prefer Reliance Industries Ltd (RIL), Infosys, Axis Bank, State Bank of India (SBI), Tata Motors, ITC, L&T, ABB from a medium term perspective.
Historically, in three instances over the past decade, the maximum bull market correction in the Nifty Midcap and Small cap indices has been in the range of 28% and 38%, respectively. In the current scenario, the two indices corrected by 22% and 32% respectively. Therefore, a correction of 4-5% from now cannot be ruled out. However, such a correction into oversold territory would pave the way for a technical pullback in the coming weeks.
Astute insights from the bank
The Bank Nifty extended losses for the third consecutive week and closed sharply lower 5% at 32,743 levels amid weak global signals as the US Federal Reserve raised the rate by 75 basis points (bps) , the largest increase since 1994, to control inflation. The weekly price action formed a significant bearish candle with a lower high-low and a bearish gap above its head (34346-33774) signaling the extension of the corrective decline. The index, contrary to our expectations, closed below the support zone of the 33000 levels during the previous week.
The daily Stochastic has approached oversold territory with a reading of 13, however, the index needs to start forming higher highs and lows in the daily chart on a sustained basis for any technical pullbacks to materialize in the charts. next sessions. Failure to do so will maintain the negative bias and lead to an extension of the decline towards the 31000 levels.
The index has an immediate hurdle around the 33800 levels being the confluence of the lower band from last Monday’s decline zone (33774-34345) and the 38.2% retracement of the past three week decline (36083- 32291).
The index has support around the 30500-31000 levels being the confluence of the following technical observations:
(a) 80% retracement of the previous major rally of December 2020 – October 2021 (28976 -41829)
(b) the previous major low of April 2021 is also placed at 30405
(Dharmesh Shah is the Technical Manager at ICICI Direct. Please consult your financial advisor before investing.)
ICICI Securities Limited is a SEBI registered research analyst under registration number. INH000000990. It is confirmed that the Research Analyst or his close relatives or I-Sec does not own the beneficial/beneficial ownership of 1% or more of the securities of the relevant company, as of the end of 06/17/2022 or have no other financial interest and do not have a material conflict of interest. I-Sec or its associates may have received compensation for investment banking/brokerage services from the relevant companies listed as clients in the previous 12 months.