Market Outlook - Technical - July 24, 2020 - Dharmesh Shah, Head - Technical, ICICI direct
(Time Zone: Arizona, USA)
Equity benchmarks continued with its northbound journey over a sixth consecutive week. As a result, Nifty ended the week at 11194, up 292 points or 2.7%. Broader markets performed in tandem with benchmark as Nifty midcap rose 1.8% while small cap rose 2.8% Sectorally, energy, financials and IT outshone while pharma, FMCG took a breather during the week.
- Nifty started the week with a positive gap (10902 - 10953) and maintained the same throughout the week, signifying resilience. As a result, index formed a bull candle carrying higher high-low, indicating elevated buying demand as it witnessed follow through strength on expect lines above past two week's consolidation breakout area of 10900
- Going forward, we maintain our positive stance with a target of 11400. Whereas we expect mid cap and small cap space to catch up and outperform the benchmark in coming weeks. Our earmarked target of 11400 is based on 80% retracement of its entire CY20 decline (12430 - 7511), placed at 11445. Nifty has rallied 18% in the past six weeks that hauled weekly stochastic oscillator in overbought territory (currently at 96). Therefore any temporary breather should not be construed as negative. Instead it should be capitalised on to accumulate quality stocks amid ongoing Q1FY21 result season.
We remain constructive on the markets on the basis of following thesis:
A) During ongoing major up move off March low of 7511, Nifty has almost approached 80% of CY20 decline (12430 -7511), 11445. Whereas, Nifty midcap and small cap indices have retraced only 61.8% of CY20 decline. Thus going ahead, we expect catch up activity to be seen in the broader market as constant improvement has been observed in market breadth. Currently, ~50% constituents of the Nifty midcap and small cap indices are sustaining above their long term 200 days SMA compared to last month's reading of ~38%, which signifies inherent strength and broadening of participation that augurs well for durability of the ongoing up move
B) Since the beginning of CY20 the domestic market have seen positive correlation with emerging markets. Currently US market has been hovering around its 80% retracement of CY20 decline. We expect domestic market to maintain same positive correlation and head towards 80% retracement of CY20 decline placed at 11445
C) Over past quarter, we have observed significant jump in daily cash turnover. As compared to April average ~Rs. 49000 cr., current turnover is near Rs. 57000 cr. An increasing trend suggests growing appetite for equities which augurs well from medium term perspective
We believe, Nifty has formed a higher base around 10900 mark and we expect it to hold in the coming week as it is confluence of:
A) Positive gap seen during last week (10902 - 10953) B) 38.2% retracement of ongoing up move (10195 -11240), at 10840 C) 200 days SMA is placed at 10863 D) Upward sloping trend line drawn adjoining subsequent lows off March low 7511, is placed around 10845