The week-long decline has given mixed signals going into the new week, though India VIX, an indicator of volatility, closed lower near 16. Large caps appear to be diverging from small and midcaps, which have attracted better risk appetite. This is evident from the fact that only 28% of Nifty 50 constituents closed the week above their respective 10-day SMA, while more than 60% of the Small Cap 250 Index constituents closed above this key near-term trend indicator. Let us see if this indicates a shift in momentum in preference for the SMIDs or if they are entering bubble proportion.
Small caps have begun to march ahead
Last two weeks we had pointed out the emergence of SMIDs from the shadow of the large caps. While no excessive moves were seen last week to suggest bubbles, we did see outperformances in SMIDs, especially the small caps, even as large caps continue to struggle.
While only 6% of the Nifty 50 stocks rose above their Upper Bollinger Band, and none closed above, 16% constituents of the Nifty Midcap 150 Index and 33% of the Nifty Small Cap 250 Index did. This indicated stronger bullish momentum than large caps. Also, 40% of the Small Cap Index constituents bounced at least 1.5% from Friday’s lows. With just 55.5% of Nifty 500 stocks closing above the previous week’s high, we do not feel that the ongoing uptrend has peaked.
PSU Bank Index poised for further upside
The PSU Bank Index closed above the supertrend level of 5766 and ended the week near a six-month high. The formation of a weekly Marubozu candle and a monthly close above the declining channel resistance suggests further upside in the coming week. Additionally, the average RSI of the index heavyweights is hovering around 59, indicating strong momentum and ample room for further upside.
From a derivatives perspective, significant long build-up was observed in PSU bank stocks on Friday and on a week-on-week basis, reinforcing the bullish outlook. We expect the index to move towards the 7100–7190 range, led by stocks such as State Bank of India, Bank of Baroda, Punjab National Bank, Indian Overseas Bank, Union Bank, and Canara Bank.
CPSE Index signals short-term weakness
An analysis of the CPSE Index indicates that the MACD has crossed below the signal line on the daily chart, and the weekly MACD histogram shows signs of exhaustion. Additionally, the formation of a bearish Marubozu candle on the weekly chart indicates potential near-term weakness. However, the medium-term outlook remains positive, with the monthly chart still favouring the bulls. From a derivatives perspective, 89% of the index stocks witnessed short build-up on Friday, and 67% showed short build-up on a week-on-week basis, further supporting the short-term bearish view.
Given this setup, we could look to play the short-term weakness, targeting a move towards the 6250–6200 zone next week, led by stocks such as ONGC, Bharat Electronics (BEL), Coal India, Oil India, and Power Grid.
Nifty outlook
Nifty closed in the red on Friday, reflecting a dull week that saw gains being eroded systematically every day since pushing above 25,000 on Monday. Collapse attempts were restrained by bargain buying emerging on every dip, though, finally allowing Nifty to close above the midpoint of the parallel trading range that has persisted for the last three weeks. Volatility, as indicated by VIX, has remained restrained despite the fluctuations through the week, while the Bollinger band has not yet shown signs of expansion.
While an upside move aiming for 26,200 remains on the cards, we feel that such a move would require more momentum than what is present at the moment. We feel that a dip to 24,500 could ignite such hopes. Slippage past the same could, however, expose 24,060, though a collapse is less expected. Alternatively, a direct rise above 25,077 could clear the path for the intermediate objective of 25,235-25,460.
First published in Financial Express
