Nifty close below 18700 to trigger a sell-off; outright collapse unlikely

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Last week, Nifty not only pushed beyond the record peak that had eluded it for more than a year but also stayed above the same for the most part of the week, with low VIX, suggesting how comfortable traders are at these levels. Our contention, while expecting a breach of this level last week, was that a powerful upsides may not follow such a break. And it appears, small and mid caps echoes this sentiment, as only 6% and 3% of mid and small-caps respectively are near 52 week highs. But this is not to say that they have not moved at all in the last week, as 28% of the mid caps and 14% of the small caps closed near the week’s high on Friday, as opposed to 16% for the NSE 500 stocks.

Last week, Nifty not only pushed beyond the record peak that had eluded it for more than year, but also stayed above the same for most part of the week, with low VIX, suggesting how comfortable traders are at these levels. Our contention, while expecting a breach of this level last week, was that a powerful upside may not follow such a break. And it appears, small and mid caps echoes this sentiment, as only 6% and 3% of mid and small-caps respectively are near 52-week highs. But this is not to say that they have not moved at all in the last week, as 28% of the mid caps and 14% of the small caps closed near the week’s high on Friday, as opposed to 16% for the NSE 500 stocks.

Meanwhile, the rallies have not pushed stocks into severe overbought levels as only 20% of the Nifty 50 stocks have RSI above 70. This is partly because, Nifty swung lower on Friday after stretching into the 18900 vicinity. This turn lower may have helped some stocks to ease from the overbought territory, some others have may have slipped into the weakening territory. Let us have a look at where the majority of the stocks are leaning towards. Post the profit booking on Friday, while only 22% and 28% of the Nifty 50 stocks fell below their 20 dma and 5 dma respectively, the corresponding figures were 33 & 37 for mid caps, and 36 & 31 for small caps. Sectorally, the turn lower was most widespread among power and consumer discretionary.

This assumes significance as Friday’s down close in Nifty resembles an evening star candlestick pattern, raising concerns of a potential correction next week. With such concerns in perspective, we would remain positive on consumer durables and realty, while staying away from power. Nifty on the other may be assumed to have topped out at 18900, if it is unable to close back above 18700, or on direct fall below 18600 on Monday. While an outright collapse is less expected, inability to close back above 18700 on Monday will delay the achievement of 19400 next week, and we could instead be looking at 18380.

First published in Financial Express

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