One point at the start of last week was how strong an offensive could the bears launch. At that point, we were just coming off a sub 25 RSI level, which had historically favoured a bounce back. But such moves also held a strong chance of fizzling out quickly. This is why we had raised our odds of a turn lower last week, potentially before reaching the much-anticipated 23,000 mount. Let us see how we are poised now, having gone through roller coaster ride, after the sharp decline last Monday.
Broader market is undecided
The shortened nature of last week left traders with little insights on the direction ahead as bulls and bears traded blows in equal measure. This resulted in a smaller bodied candle for the week on the Nifty 50, when compared to the previous two weeks. But the sharp down close on Thursday also meant that more stocks on the Nifty 500 index closed below their 10 day SMA when compared to last week. While over 73% NSE 500 constituents were trading above this key short move MA by the end of the previous week, only 43% stocks closed above the same, last Thursday.
Sectoral cues
Nifty IT index has broken below the monthly 61.8% Fibonacci retracement level of June 2024 low to Dec 2024 high move, hinting at more downsides. Also, the monthly MACD has broken below the signal line adding to the negative sentiment. Last time when similar downside happened in Nifty IT in Apr 2000, we saw 44% fall since the break of Fibonacci golden ratio. Similar breakout favoring downsides are seen in heavyweights like Infosys, Wipro, HCL Tech, LTIMindtree and Tech Mahindra which are expected to trigger more downsides in the index.
Meanwhile, in defence sector, most of the stocks have corrected more than 50% from the July highs and the heavyweights have started to build a base and looks to be gearing up for reversal. The average 14-day RSI of the major defence stocks is around 45 which shows more room on the upside. Expect Bharat Electronics, Mazagon Dock Shipbuilders, Hindustan Aeronautics, Bharat Dynamics, Cochin Shipyard, Paras Defence and Space Technologies, BEML and Bharat Forge to participate in the reversal attempt.
Nifty outlook
We will start the week taking solace from the fact that a weak entry into the earning season will provide a good launch pad for gains, if earnings support. It is important to have the right price lend traction to earnings cues, because, when the sentiment is not at its best, relative price becomes very crucial in take directions.
In the last 10 years, 80% of the time Nifty has seen around 3% upside in the 3 to 4 weeks prior to the start of Q4 earnings. The first 30 days since the start of the earnings season, net return in Nifty during the last 10 years has been around -0.18%. 80% of the time, the next 3 months have given around 8% return. Last week harboured the hopes of 23,000-23,500, as meaningful gains post the MACD crossover is yet to materialize. We were also counting on bounce back usually seen from sub 25 RSI levels, where we were on 4th March.
Incidentally this move has mirrored the last instance of such bounce back which occurred in early August 2019, in terms of both the quantum of bounce as well as the duration. Further, the rejection trade from the 20-day SMA early last week, resembles how Nifty turned lower from 50-day SMA in early Feb. This ideally prepares the ground for a down move aiming the 22,000-21,700 region.
That said, the corrective waves, post the turn lower from last Monday, is appearing to form a W pattern in hourly chart, hinting at a premature end to the corrections. Towards this end, we will look for a break of 22,319, the W’s bottom, or 22,587, the 20-day SMA for confirming a range breakout. We will also take cues from the fact that despite a sharp down close to end last week, a piercing candle appears to have been avoided, providing a fair platform for continuation of previous week’s gains.
First published in Financial Express
