Nifty continues record-setting spree, targets 19,700; Bank Nifty undergoes profit-booking, buy on dips

Nifty 50 endured its record setting spree over third consecutive week buoyed by firm global cues. As a result, Nifty settled last week at 19,565, up 1.2%. The broader market performed in tandem with the benchmark as Nifty Midcap, Smallcap gained 1.3% and 1.9%, respectively. Sectorally, IT, metal, realty while financials took a breather.

Technical Outlook

The Nifty started the week on a muted note, however buying demand in the fag end of the week helped the index to clock a fresh all time high of 19,595. As a result, weekly price action formed a bull candle carrying higher high-low, indicating continuance of positive bias. The index regained upward momentum and resolved out of the past eight sessions consolidation range (19,500-19,300).

Going ahead, we reiterate our positive bias and expect Nifty to gradually head towards our earmarked target of 19,700. The index is showing significant resilience as intermediate corrections are getting bought into. Consequently, the buy on dips strategy has worked well since March-23. Key point to highlight is that the US dollar index breakdown below multi quarter support of 100 indicates downward acceleration towards 96 in coming months. This will act as a tailwind for more foreign funds flowing in EM and India is a key beneficiary given strong macros.

On the broader market front, Nifty midcap recorded a fresh all time high and small cap index closed at 15 months high. The current up move is backed by sturdy market breadth as currently 78% stocks are trading above 200 DMA, highlighting inherent strength that bodes well for durability of ongoing up move.

Sectorally, BFSI, IT, metal, PSU, Pharma would remain in focus. Highlighting point is that, the laggard sectors like IT, Metals have been a relative outperformer last week and price action indicates money flowing to these sectors amid lower US inflation, weak US dollar index and declining Chinese steel exports. We expect these sectors to catch up from hereon.

On stock front, in large cap we prefer Kotak Mahindra Bank, SBI, Tech Mahindra, LTI Mindtree, Sun Pharma, ONGC, Hindalco, DLF while in midcap Ashok Leyland, Granules, AIA Engineering, Newgen, GMDC, Balkrishna Industries, Oberoi Realty, Biocon, Delhivery, Escorts, Indian Bank will remain in focus. Structurally, since March buy on dips strategy has continued to fare well as Nifty has not corrected more than 400 points while sustaining above 20 days EMA. Thus, any decline from hereon should not be construed as negative instead capitalize it as an incremental buying opportunity as we do not expect index to breach the key support threshold of 19,300-19,200, being confluence of:

A) 38.2% retracement of current up move (18,645-19,523), at 19,232;

B) Since March index has not closed below previous weeks low. Last week’s low was placed at 19,327.

Nifty Chart

Bank Nifty Outlook

The Bank Nifty index underwent profit booking last week amid marginal profit booking in PSU banks after higher inflation and ahead of Q1FY24 earnings. The Bank Nifty closed at 44,819, down 0.24% for the week. The Weekly price action formed Doji with lower high low formation indicating extended profit booking near life highs.

Key observation in recent decline from life highs of 45,655 is that the index has retraced preceding six session rally (43,519-45,655) by just 50% over eight sessions. Shallow pace of retracement of rally is a sign of inherent strength and positive price structure and therefore strategy of buying dips is recommended.

We expect the index to hold key support of 44,000 and gradually head towards life highs of 45,655 in coming weeks. Sustaining above 45,655 would indicate resumption of upward momentum towards 46300 in July as it is 138.2% external retracement of Dec-Mar decline (44,151-38,613).

Structurally, PSU banks are expected to relatively outperform as the PSU banking index is poised for multi-year breakout indicating structural turnaround. Correction in PSU stocks is a buying opportunity. We expect strong support to exist around 44,000 as it is 61.8% retracement of most recent up move from lows of 43,519 and confluence of rising 50 day EMA (44,000).

(Dharmesh Shah – Head Technical at ICICI Direct. Views expressed are the author’s own. Please consult your financial advisor before investing.)