Market Outlook - Technnical - Oct 9, 2020 - Dharmesh Shah, Head - Technical, ICICI direct
Equity benchmarks extended gains over second consecutive week tracking buoyant global cues. The Nifty ended the week at 11914, up 4.4%. Sectorally, IT, financials and auto outshone while, energy, FMCG took a breather.
The Nifty started the week with a positive gap (11417-11452) and continued to inch northward throughout the week. As a result, index formed a bullish belt hold line candle, indicating acceleration of upward momentum. In the process, the index completely retraced preceding four week's corrective phase in just two weeks, steering it beyond our intermediate target of 11800 and resolved out of past five weeks trading range (11794-10790).
The five week range breakout supported by faster pace of retracement signifies robust price structure from medium term perspective. Considering this price development and multi sectoral participation, we reiterate our broader constructive stance and expect Nifty to retest life highs of 12400 by December 2020.
The index has rallied 1150 points in just 10 trading sessions during ongoing up move (off September low 10790) which hauled daily stochastic oscillator in overbought territory (at 94). Thus, possibility of temporary breather at 12000-12100 range cannot be ruled out. However, we believe, such breather should not be construed as negative as the broader structure remains positive. Instead, dips should be capitalized as an incremental buying opportunity in quality stocks amid ongoing Q2FY21 result season.
In line with our view, the bank Nifty witnessed follow through strength to last week's higher high-low formation and closed above 200 days SMA for the first time since March, indicating revived buying demand at elevated support base. Going ahead, we expect Banking stocks (which carries 33% weightage in the benchmark Nifty) to resolve higher in coming weeks which would drive benchmark index Nifty to endure ongoing up move.
We expect broader market to witness catch up activity as Nifty has surpassed August high whereas Nifty mid cap and small cap indices have been forming a higher base at their 80% retracement. This has been backed by sturdy market breadth as currently 65% stocks of Nifty midcap and small cap indices are above 200 days SMA compared to last two week's reading of ~55%, which bodes well for durability of the ongoing up move.
The formation of higher high-low signifies elevated buying demand which makes us confident to revise support base at 11500 as it is confluence of a) as per change of polarity concept earlier resistance of 11500 would now act as immediate support b) last week's low is placed at 11450.