Nifty, Bank Nifty could be approaching a bottom; prefer BFSI and IT to participate in pullback

By Dharmesh Shah

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Equity benchmarks concluded the truncated last week on a subdued note amid elevated volatility owing to surging Covid-19 wave 2 across India. The Nifty ended the week at 14341, down 1.8%. The broader market relatively outperformed as Nifty midcap lost 1% while small-cap remained flat. Sectorally, pharma and metal remained outlier while consumption, IT and Infra underperformed.

Despite anxiety around surging COVID-19 cases across India, the index managed to hold the key support threshold of 14200 on multiple occasions over past six weeks, as the elevated buying demand emerged in the vicinity of 100 days EMA placed at 14170. As a result, weekly price action index formed a high wave candle, indicating elevated volatility at key support base of 14200.

Going ahead, we expect index to resolve higher and gradually head towards upper band of falling channel placed at 14800 in the coming months. Our constructive thesis on the market is based on the following observations:

1. Since March 2020, Nifty and BankNifty has a maintained rhythm of not correcting more than 9% and 20% respectively. With both indices approaching price wise maturity of correction, we expect BankNifty to drive Nifty higher as financials carries 38% weightage in Nifty  
2. Key point to highlight during past two months corrective phase is that, the decline has been captured in a well define falling channel. Over past two weeks, index has been forming a base at lower band of falling channel. We expect index to resolve higher and head towards upper band of channel placed at 14800.

Sectorally, We prefer BFSI, IT and Consumption sectors to participate in pullback given their favourable risk-reward setups.

On the stock front, within Amongst large caps, we like TCS, Axis Bank, HDFC, Bajaj Finserv, Tata Steel while Astral Poly, Polycab, Graphite, Jindal steel& Power, Thermax, Sequent Scientific, Indoco Remides ,  InfoEdge, are expected to outperform in midcap space.

The broader market indices have shown resilience by forming a higher base above 50 days EMA, which has been held since June 2020. Key point to highlight is that, the Nifty midcap and small cap indices have maintained the rhythm of not correcting for more than average 10%, since March 2020, indicating robust price structure. Currently, both indices have corrected 8% from their 52 weeks high. We expect both indices to maintain their rhythm of not correcting for more than 10% and gradually accelerate its relative outperformance against benchmark. Therefore, dip should be used as incremental buying opportunity.

Structurally, key support is placed at 14200. Only the breach below 14200 would lead to extended correction towards strong support zone of 13900-13800, as it is a confluence of:

1. a) 80% retracement of the February rally (13596-15432), at 13963
2. b) 10% correction from life highs (15432) measures around 13900

Bank Nifty outlook

Bank Nifty on the weekly time frame formed a bull candle with shadows in either direction highlighting intraweek volatility. Index despite Monday’s gap down opening managed to hold near the last week low (30500) and gradually recovered its entire intraweek decline to close marginally lower highlighting buying demand at lower levels amid oversold placement of the weekly stochastic.   

Going ahead, we reiterate our view that the downsides is limited in Banking index and we expect it to eventually head towards 34000 levels in the coming month as it is the confluence of the 50% retracement of the entire decline (37708-30405) and measuring implication of the last two weeks consolidation range (32325-30405). Hence, one should accumulate quality banking stocks in the range of 30500-31200 to ride next expected up move.

Key point to highlight is since March 2020 bottom, the index has maintained rhythm of not correcting for more than 20%. In the current scenario, the index is forming higher base after correcting 19% from the all-time high (37708). Bank Nifty in the last two weeks has rebounded three times after testing the support area of 30500. Hence the index is poised at crucial support and provides favourable risk-reward setup.

The last 10 weeks corrective decline has led to the weekly stochastic placed near the oversold territory with a reading of 22 indicating an impending pullback in the coming weeks.

(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 22/04/2021 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.