Meanwhile, the Bank Nifty has been underperforming and may continue to do so.
On Friday, the Nifty closed lower by 1.2% at 24,717.70, while the Bank Nifty ended 0.41% or 214 points lower at 51,350.15.
Analyst Sudeep Shah, Deputy Vice President and Head of Technical & Derivatives Research at SBI Securities, discussed the outlook for the Nifty and Bank Nifty, as well as an index strategy for the week, with ET Markets. Here are the edited excerpts from his conversation:The Nifty and Sensex made new highs again on Thursday. However, immediately after a day, the index opened a gap down. Where do you think the index is headed? Are there any higher levels that you see coming in the near term or some consolidation might be expected?
During the last week, the benchmark index Nifty reached a new milestone by surpassing the 25,000 mark for the first time, marking a historic achievement in the market. However, on Thursday, the US market experienced a sharp selloff due to disappointing economic data, which overshadowed optimism about a potential interest rate cut by the Federal Reserve. This led to profit booking in our markets as well on Friday.
As a result, the benchmark index Nifty tumbled by over 360 points, ending the week at 24,717 level with a loss of 0.47%, breaking an eight-week winning streak. Along with this decline, Nifty retraced almost 38.2% of the Fibonacci retracement level (24,703) of its prior upward rally (24,074-25,078). Additionally, it slipped below its 5 and 8-day EMA levels. The internal strength of the market has weakened significantly, with only 62% of the index constituents trading above their 20-day EMA level.
Further, a negative divergence was identified on the daily timeframe of the 14-period RSI. A negative divergence occurs when the price makes a higher high, while the RSI forms a lower high. This suggests that traders should avoid building overleveraged positions and chasing prices. Instead, adopting a buy-on-dips approach is advisable.
Talking about levels, the zone of 24,500-24,540 will act as strong support for the index as it is the confluence of the 20-day EMA level and the 50% Fibonacci retracement level of its prior upward rally (24,074-25,078). If the index slips below the level of 24,500, then the next support is placed in the 24,300-24,250 zone. While, on the upside, the resistance has shifted lower in the zone of the 24,900-24,950 level.
We are already one week into the August series for Nifty. How has the week been so far, and what is the outlook for the month ahead given the earnings viz the current market performance?
Looking at the chart structure and the price action of the last few days, it looks like we could head into a phase of consolidation with a negative bias. With the results season currently underway it’s going to a stock-specific market in the next few sessions. The earnings of the largecap companies so far have not been anything out of the box.
Nifty could witness a consolidation between 24,950 and 24,500, a correction below which we could see a further slide towards 24,300 levels.
A healthy correction would provide the market’s breathing space before we witness the next leg of the upmove.
Bank Nifty took support at the 50-day EMA last Friday, bounced back trying to regain the 10 and 20 DEMA, and opened gap down this Friday to take support on 50 DEMA. There is clearly a lack of direction. But why is it so?
Yes, the lack of direction is visible. The momentum indicators and oscillators also portray a similar picture. The daily RSI has been in the sideways zone since the last 11 trading sessions as per RSI range shift rules. The trend strength indicator, ADX, is currently quoting at 14.54 level, and it is in falling mode. This clearly shows a lack of direction on either side.
We believe this is mainly due to the mixed trend from the largecap banking stocks. HDFC Bank has formed a strong base near the 1,590 level and resumed its upward journey. It is currently trading above its 20-day EMA level. ICICI Bank is trading below its 20-day EMA level. The Axis Bank is showing notable weakness as it is trading below its 20, 50, and 100-day EMA level.
Do you feel HDFC could pull the index up, given its performance this week?
The stock has formed a strong base near its 50-day EMA level and 50 percent Fibonacci retracement level of its prior upward rally (1,426-1,759). On Friday, it surged above its prior swing high (1,651). Currently, it is trading above its short and long-term moving averages. These averages are in a rising trajectory, and they are in the desired sequence, which suggests the trend is strong. The daily RSI is about to cross the 60 mark, and it is trading above its 9-day EMA level.
This technical structure indicates that the stock may help the index to sustain at the current level.
Is there a tradable range that you see for the traders in the Bank Nifty? Or the suggestion is to stick with Nifty?
We believe that if the Bank Nifty slips below its 50-day EMA level (51,048), then we may witness a sharp correction up to the level of 50,400 in the short term. While, on the upside, the zone of 51,900-52,000 will act as an immediate hurdle for the index.
What is your view on SEBI’s proposal on one weekly expiry on each exchange?
Indian equity markets have seen a phenomenal surge in Index Options trading since COVID-19 with the retail public getting hooked on to the weekly Index expires. Concerns regarding the same have led to SEBI considering curbing the number of weekly expires per exchange. The objective is to restrain the retail public from over-trading and prevent systemic risk to the markets. This could also help traders strategize and plan their trades in a better way as they would have to focus on 1 index instead of 3-4 indices during the week.
What impact do you see on the minimum lot size being increased from the current 5-10 lakh to 20-20 lakh? Do you think traders will be thrown out of the market following the increase in lot size?
This will definitely have an impact on the volumes, which could see a dip. The surge in contract size is bound to impact option sellers who have to pay a margin similar to futures while placing the trade due to the higher risk associated. If there is a decrease in volumes, it could have an impact on the spreads and the volatility of the option price.
In case Sebi measures come into effect, will the participants’ interest shift to stock options from index options?
The measures suggested so far have to do with Index Options, which is the most traded product in the Indian equity markets. However, the type of price action seen in Index Options is rarely seen in stock options, so traders would try to adjust with the new measures rather than shift focus to stock options.
Plus, we could see additional interest from traders who are currently trading in Index futures shift towards Index Options due to the sharp surge in the cost of trading Index futures and the margins associated with it.
Do you have any sectors in focus? And within those specific stocks that are well placed?
Technically, Nifty Pharma and Nifty Healthcare are likely to outperform in the short term. Divi’s Lab and Dr Reddy’s look good on daily and weekly charts.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)