Over the week, these benchmark indices fell by more than 4%, with a broad-based decline across sectors such as auto, banking, infrastructure, and energy.
However, the IT index remained relatively unaffected, buoyed by improved revenue and spending outlooks following a more dovish stance from the US Federal Reserve. Additionally, stimulus measures in China created a positive ripple effect on metal stocks.
Analyst Sudeep Shah, Deputy Vice President and Head of Technical & Derivatives Research, SBI Securities interacted with ET Markets regarding the outlook on Nifty and Bank Nifty and an index strategy for the upcoming week.
Following are the edited excerpts from his chat:
Nifty is below the 20 DEMA, and Friday’s candle shows a that bears might be taking over. What are the main factors according to you that are causing the weakness?
Firstly, Nifty has witnessed a strong upward rally over the past couple of months, without any major timewise and price-wise correction. This has left many momentum indicators in the overbought zone, and last month, the Monthly RSI even hit 83, a sign of extreme overbought conditions.
Secondly, the growing geopolitical tensions in the Middle East have pushed crude oil prices up sharply in the last few days. Rising oil prices add pressure to markets.
Lastly, SEBI’s recent changes to the derivative market are also adding to the weakness. Together, these factors are contributing to the weakness in Nifty.
How should retail investors respond to the increased volatility caused by macroeconomic and regulatory factors? What course of action should they take?
Retail investors should adopt a cautious approach and avoid overleveraging positions. Also, we will recommend avoiding bottom fishing in Mid and Small Caps space during heightened volatility.
It’s also crucial to set stop-losses to protect against significant downside risks, as this can help minimize losses in a highly volatile market. Stop-losses act as a safeguard, allowing investors to manage risk and prevent emotional decisions during sharp market swings.
The Iran-Israel conflict caused the market to crash. But traditionally, all such dips are bought. Combining this aspect with a technical aspect, Nifty is also slightly below the 50 DEMA. What should one do in such a placement? Buy or wait?
We will recommend waiting for now as the Nifty has slipped below its 20 and 50-day EMA. Also, it has sustained below the 50 percent Fibonacci retracement level of its prior upward rally (23,893-26,277). The momentum indicators and oscillators also suggest a weakness. The daily RSI is about to slip below the 40 mark, and it is in falling mode. Hence, it would be wise to remain patient until clearer technical signals of a potential reversal appear.
How do you view China’s aim to boost its economy affecting the Indian markets with respect to the foreign fund inflow?
We believe that China’s efforts to boost its economy could shift foreign fund flows in the near term. If these policies attract global investors, inflows into Indian equities might decrease. However, it’s essential to monitor the effectiveness of China’s initiatives.
If China’s recovery appears weak, India could remain attractive due to its stronger fundamentals.
What are your views on HDFC Bank?
HDFC Bank gave a Symmetrical Triangle breakout on September 12 and thereafter, it has witnessed a sharp upside rally of over 8% in just 10 trading sessions. However, it has marked a high of Rs 1,788 and thereafter witnessed a sharp correction of over 7% in just 6 trading sessions. Along with this fall, the stock has slipped below its 20 and 50-day EMA levels. The daily RSI is about to slip below its 40 mark and it is in falling mode.
Going ahead, the zone of Rs 1,635-1,630 will act as immediate support for the stock as the 100-day EMA and prior swing low is placed in that region. Any sustainable move below the level of Rs 1,630 will lead to further selling pressure up to the level of Rs 1,580 in the short-term. While, on the upside, the resistance has shifted lower in the zone of Rs 1,690-1,700 level.
What is your stance on Bank Nifty?
From the all-time high level, the banking benchmark index Bank Nifty has corrected nearly 3000 points or 5.42% in just 6 trading sessions. Along with this sharp fall, the index has slipped below its 20 and 50-day EMA level. These averages have started edging lower. Further, the rising slope of 100 and 200-day EMA has slowed down significantly. Furthermore, the daily RSI has given a trendline breakdown, which is a bearish sign.
Going ahead, the 100-day EMA zone of 5,1000-50,900 will act as immediate support for the index. Any sustainable move below the level of 50,900 will lead to further correction in the index. In that case, the zone of 50,400-50,300 will act as a crucial support for the index. While, on the upside, the 50-day EMA will act as an immediate hurdle for the index, which is currently placed in the zone of 51,900-51,950 level.
What are your views on RIL?
Reliance Industries has been significantly underperforming the major indices in recent months. The ratio chart of Reliance against Nifty has now dropped to a 55-month low, indicating sustained weakness relative to the broader market.
Further, it has recently given an upward sloping trendline breakdown on a daily scale along with higher volume. Furthermore, it has slipped below its 200-day EMA level for the first time after November 2023. The momentum indicators and oscillators are also suggesting bearish momentum. The daily RSI is in bearish territory, and it is in falling mode.
Hence, we believe it is likely to continue its southward journey and test the level of Rs 2,700, followed by Rs 2,650 in the short term. On the upside, the 200-day EMA will act as a major hurdle for the index, which is currently placed at Rs 2,865 level.
Do you foresee the retail participation shift to stock options?
Yes, the new SEBI guidelines, particularly the margin requirements and contract sizes for index options, could prompt retail traders to shift towards stock options. Stock options often require lower capital, which may appeal to retail participants seeking lower-risk, lower-margin alternatives.
What is your view of a better opportunity? Index or stocks?
We believe stock-specific opportunities present a better prospect than index trading, primarily because the broader stock basket offers more choices and flexibility. Stocks allow for targeted strategies, enabling investors to select technically strong companies or sectors. In contrast, index trading provides a broader exposure but limits the ability to capitalize on specific outperformers. With careful stock-picking, there’s potential for higher returns.
Nifty IT is trading in green but the index is still in a consolidation phase. Do you see any opportunities for the investors there?
Nifty IT has outperformed frontline indices in the last week. The ratio chart of Nifty IT as compared to Nifty has been marking the higher highs since the last four trading sessions. This suggests strength in the sector, presenting potential opportunities for investors.
Going ahead, the zone of 42,600-42,700 will act as an immediate hurdle for the index. Any sustainable move above the level of 42700 will lead to sharp upside rally upto the level of 43,300, followed by 43,800 in the short term.
Similarly, does pharma provide any such opportunities?
Nifty Pharma has also outperformed frontline indices in the last week. Going ahead, the zone of 23,500-23,600 will act as an immediate hurdle for the index. Any sustainable move above the level of 23,600 will lead to sharp upside rally upto the level of 24,000, followed by 24,400 in the short-term. While, on the downside, the zone of 22,750-22,700 will act as immediate support for the index.
Are there specific sectors that may see further decline in the near future?
Technically, Nifty Bank, Nifty Financial Services, and Nifty Realty look bearish. We may see further selling pressure in these sectors.
Any defensive sectors to watch out for?
Technically, Nifty Healthcare, Nifty Pharma, and Nifty IT have been outperforming the frontline indices since the last couple of trading sessions and should be on a trader’s radar
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)