Market Outlook - Technical - August 8, 2020 - ICICI Securitie
Dharmesh Shah, Head - Technical, ICICI direct
Equity benchmarks edged higher amid ongoing earnings season as Nifty settled at 11215, up 1.3% or 142 points for the week. Broader markets outperformed on expected lines as Nifty Mid cap and small cap indices gained 4% and 5% respectively for the week.
- The market action was in line with expectations as the Nifty tested and held lower band of consolidation at 10900 amid a breather as buying demand emerged from 200 day moving average placed at 10850, while midcap and small caps outnumbered benchmarks significantly. The weekly price action of Nifty resulted in a Bull candle with lower high-low, indicating a breather after 19% rally in preceding seven weeks and after approaching our target around 11400.
- We reiterate our stance of an outperformance in mid cap and small cap space while Nifty undergoes a healthy consolidation in the broad range of 10900-11400. Such a consolidation will make larger price structure more robust as indices will re-establish a higher base which will act as a launch pad for next major up move. We believe ongoing temporary breather after past seven weeks 19% (9544-11340) rally will help weekly stochastic to cool off from overbought trajectory which will count as added positive in technical terms. Hence, any dip from hereon should not be construed as negative, instead should be capitalised as an incremental buying opportunity in quality stocks with focus on midcap and small caps to benefit from their outperformance. Our opinion is based on following key technical observations:
a) Indian indices have enjoyed very strong correlation with developed market indices throughout CY20. Outperformance of mid cap and small caps is a prominent theme across global equities currently and Indian markets are expected to follow this correlation
b) Since 2009, post major corrections, rallies in Nifty Mid cap and Small Cap indices have lasted for 15 to 16 weeks without any significant correction. We expect this historical rhythm to play out for current rally as well. As both indices are in 12th week of rally, we are still away from maturity of an uptrend
c) At present, Nifty has almost retraced 80% of CY20 decline (12430-7511), whereas, Nifty midcap, small cap indices are at least 8-10% away from their 80% retracement. Hence, we expect catch up activity in the broader market to continue as strong improvement has been observed in market breadth. Currently, ~55% constituents of the Nifty midcap, small cap indices are sustaining above their long term 200 days SMA compared to last week's reading of 45% and prior month's reading of ~35%, which signifies broadening of participation that augurs well for longevity of trend
- We expect ongoing breather to get anchored around key support threshold of 10900 mark in the coming weeks as it is confluence of:
A) positive gap seen during mid-July (10902 - 10953) B) 38.2% retracement of ongoing up move (10195 -11341), at 10903 C) 200 days SMA is placed at 10850 D) upward sloping trend line drawn adjoining subsequent lows off March low 7511, placed around 10945.