We had entered last week harbouring hopes towards continuation of uptrend, despite sharp cuts on the Nifty bank index. However, the pull back that has brought the index back inside the descending broadening wedge forces us a rethink on the direction.
Two dojis in as many days point to bearish exhaustion, and we could possibly see a recovery, but there are no outright indications to view such a move as anything other than a dead cat bounce. Favoured view expects slippage to 45900, but a pull back above 47000 could serve to cut back negativity.
Meanwhile broader market continues to reel under the pressure of exodus from smaller capitalised stocks. While thursday’s recovery rally in small and mid caps was encouraging, Friday saw momentum fizzling off, taking our attention towards the 38% fibo where the bounce back of Nifty Midcap index has seemingly ended.
This nudges us to view this move as a dead cat bounce, potentially pointing towards more falls to fully straighten the oscillator divergences that have been in play for months on. Put differently, it is not relative cheapness that we are weighing now, but rather the sustainability of the recovery attempts. We are of the view that risk reward is not in favour of buying into dip right away on the mid and small caps.
However, seasonality favours being positive in March, especially in an election year, during which time, the month has seen strong gains in the past three such years on the Nifty. This prompts us to look even more carefully at the 22000-21900 region whose proximity is where we are now.
This region is the 38% retracement of year high-low, and also near the 50day SMA support which Nifty has acknowledged on three consecutive days, despite strong attempts to penetrate.
We feel that these levels may not survive a fresh onslaught, making 21670 as the nearest objective, while projecting 20250 as the likely trough, should we see a collapse. Alternatively, direct rise above 22050 could allow a relief rally, but unless we see a close above 22400, the prospects of a dive deep down would be alive.
First published in Financial Express