Market Outlook - Technical - Dharmesh Shah, Head - Technical, ICICI direct
Week that was...
Equity benchmarks rallied over third consecutive week amid upbeat global cues. The Nifty ended the week at 10607, up 224 points or 2.2%. Broader market took breather after last month's sharp up move, as a result Nifty midcap rose 0.4% while small cap remain unchanged. Sectorally, auto, NBFC and FMCG outshone during the week while metal, Pharma and PSU Banks underperformed.
- On expected lines, Nifty managed to hold last week's low (10200) and eventually resolved higher, aiding index to approach upper band of consolidation at 10600. As a result, weekly price action formed a bull candle carrying higher high-low, indicating continuance of positive bias as per classic Dow theory
- In the coming weeks, we expect index to resolve higher and extend the ongoing up move towards 10900 which is confluence of 200 days SMA, placed at 10890, coincided with negative gap seen during mid-March (10827-10752). We have turned constructive on the markets on the basis of following thesis:
a) Key point to highlight during the week is that, Nifty entirely retraced preceding five session's corrective move (10553 - 10195) in just two sessions. The faster pace of retracement signifies structural improvement, auguring well for next leg of up move
b) During ongoing major up move since March low of 7511, barring one instance, the index has not corrected for more than two consecutive sessions. We expect index to maintain this rhythm of not correcting for more than two sessions. Thus, we believe, any temporary breather from hereon should be used as incremental buying opportunity in quality stocks
c) India VIX (which gauges market sentiment) extended its losses and settled below 200 days EMA for the first time since February 2020, indicating dwindling volatility, which signifies continuance of risk-on sentiment. The VIX has inverse correlation with the Nifty. Thus, we believe falling VIX will continue to act as tailwind for the next leg of up move
d) Despite elevated global volatility, Nifty midcap and small cap indices relatively outperformed during June 2020, as both indices rallied 11% and 15%, respectively. Meanwhile, on the breadth front, more than 65% constituents of the Nifty mid cap and small cap indices are sustaining above their 100 days SMA compared to last month's reading of ~30%, indicating improving market breadth that signifies broader market participation.
- The formation of higher peak and trough underpinned by improving market breadth makes us confident of revising support base on Nifty at 10200 as it is, a) 38.2% retracement of last major up move (9544 - 10553), at 10168 b) in three out of past seven sessions Nifty bounced from 10200 mark, indicating elevated support at last week's low of 10200.