Meanwhile, Bank Nifty’s performance has been weak and is likely to continue.
On Friday, Nifty closed down 1.2% at 24,717.70, while Bank Nifty fell 0.41% or 214 points to 51,350.15.
Analyst Sudip Shah, Vice President and Head of Technology and Derivatives Research at SBI Securities, spoke with ET Markets about the outlook for Nifty and Bank Nifty and his index strategy for the week ahead. Here are edited excerpts from his conversation.Nifty and Sensex hit new highs again on Thursday. But within a day, the indices opened a gap down. Where do you think the indices are headed? Do you see higher levels in the near future? Or are you expecting some consolidation?
Last week, the benchmark index Nifty crossed the 25,000 mark for the first time, reaching a new milestone, a historic feat for the market. However, US markets experienced a sharp selloff on Thursday due to disappointing economic data, which overshadowed optimism about a potential rate cut by the Federal Reserve. This also led to profit taking in our markets on Friday.
As a result, the benchmark index Nifty plunged over 360 points to end the weekend at 24,717, down 0.47%, ending its eight-week winning streak. With this decline, Nifty retracement of around 38.2% of the Fibonacci correction level (24,703) of the previous rally (24,074-25,078). It also fell below the 5-day and 8-day EMA levels. The market’s internal strength has weakened considerably, with only 62% of the index constituents trading above the 20-day EMA level.
Also, a negative divergence was observed on the daily timeframe of the 14-period RSI. A negative divergence occurs when the price makes a higher high while the RSI makes a lower high. This suggests that traders should avoid building excessive leveraged positions and chasing prices. Instead, it is recommended to adopt a buy-on-the-dip approach.
Speaking of levels, the 24,500-24,540 zone will act as a strong support for the index as it is the confluence of the 20-day EMA level and the 50% Fibonacci correction level of the previous bullish rally (24,074-25,078). If the index breaks below the 24,500 level, the next support will be located at the 24,300-24,250 zone. On the other hand, in the uptrend, the resistance has been lowered to the 24,900-24,950 zone.
We’ve already spent a week on the Nifty August series. How has the week been so far and what is your outlook for the month ahead given the current market performance?
Looking at the chart structure and price action over the past few days, it looks like we may be entering a consolidation phase with a negative bias. As earnings season is currently underway, we will be going to the stock market for the next few sessions. Earnings from large cap companies have not been out of the box so far.
Nifty may consolidate between 24,950 and 24,500, and a correction below these levels could lead to further declines towards 24,300 levels.
A healthy correction will give the market some breathing room before the next uptrend begins.
Bank Nifty found support at 50-day EMA last Friday, bounced back to reclaim 10-day and 20-day DEMA, and this Friday gapped down to find support at 50-day DEMA. There is clearly a lack of direction. But why?
Yes, the lack of direction is evident. The momentum indicator and the oscillator show a similar picture. The daily RSI has been in a sideways range since the last 11 trading sessions, according to the RSI range movement rule. The ADX, the trend strength indicator, is currently trading at the 14.54 level and is in a downtrend mode. This clearly shows the lack of direction on both sides.
We believe this is mainly due to the mixed trend in the large banking stocks. HDFC Bank has formed a strong base near 1,590 levels and resumed its upward journey. It is currently trading above 20-day EMA levels. ICICI Bank is trading below 20-day EMA levels. Axis Bank is trading below 20, 50 and 100-day EMA levels, showing significant weakness.
Given this week’s performance, do you think HDFC can lead the index?
The stock has formed a strong base near the 50-day EMA level and the 50% Fibonacci correction level of the previous rally (1,426-1,759). It surged above the previous swing high (1,651) on Friday. It is currently trading above the short-term and long-term moving averages. These averages are in an uptrend and in the desired order, which suggests that the trend is strong. The daily RSI is on track to cross 60 and is trading above the 9-day EMA level.
This technical structure suggests that the stock could help the index maintain its current levels.
Is there a tradable range for traders in Bank Nifty or is it better to stick to Nifty?
We believe that if Bank Nifty breaks below the 50-day EMA level (51,048), we may witness a sharp correction towards 50,400 levels in the short term. On the other hand, in an uptrend, the 51,900-52,000 zone will act as an immediate hurdle for the index.
What is your view on SEBI’s proposal to have weekly expiry dates on each exchange?
Indian stock markets have seen a huge surge in index options trading post COVID-19, with retail crowds engrossed in weekly index expiries. Concerns over this have prompted SEBI to consider capping the number of weekly expiries per exchange. The aim is to discourage over-trading by retail crowds and prevent systemic risk to the market. This will also help traders strategize and plan their trades in a better way as they will have to focus on one index instead of 3-4 during the week.
What do you think will be the impact of increasing the minimum lot size from the current 5-10 lakh to 20-20 lakh? Do you think increased lot size will drive traders out of the market?
This can certainly affect volumes, which can lead to a decline. A surge in contract sizes is bound to affect option sellers, who have to pay similar margins to futures when trading. This is because the risk associated with volumes is higher. A decrease in volumes can affect spreads and the volatility of option prices.
Will the SEC’s action shift participants’ attention from index options to equity options?
The proposed measures so far relate to index options, the most traded instrument in the Indian stock market. However, the type of price action seen in index options is rarely seen in equity options, so traders will likely want to adapt to the new measures rather than focus on equity options.
Additionally, we are seeing traders currently trading index futures turn to index options, as the costs of trading index futures and the associated margins have skyrocketed.
Are there any sectors that you’re interested in? And are there any sectors that you’re well positioned in within those particular stocks?
Technically, Nifty Pharma and Nifty Healthcare are likely to outperform in the short term. Divi’s Lab and Dr Reddy’s look good on the daily and weekly charts.
(Disclaimer: Recommendations, suggestions, views and opinions provided by experts are their own and do not necessarily represent the views of The Economic Times.)
