Charts Indicate Optimistic Outlook With Caution

In the last truncated week, the equities rallied impulsively. NSE Nifty gained by 1023.10 points or 4.48 per cent in just three trading sessions. BSE Sensex is also up by 4.52 per cent. The Midcap and Smallcap indices advanced by 4.27 per cent and 4.55 per cent, respectively. The Microcap-250 index gained 4.86 per cent. All sectoral indices closed in the green. The Realty index is the top gainer with 6.95 per cent. The Bank Nifty and FinNifty are up by 6.45 per cent and 6.17 per cent. The Media and Auto indices are advanced by 5.14 per cent and 4.01 per cent. The market breadth is extremely positive. The Volatility index, India VIX, is down by 23.08 per cent to 15.46. The FIIs bought Rs14,670.14 crore last week, and the DIIs sold Rs6,470.52 crore worth of equities.

The Nifty has registered the most bullish week by closing above the 30-week average. The Index closed near the previous swing high, and the highest closing after 3rd January. Because of the three-day truncated week, the volumes were lower than the prior week. But for the last eight days, the volumes were above-average. On a weekly time frame, and a line chart, the Nifty has broken out of an inverted Head and Shoulders pattern. In all parameters, the Index has now ended the bearish phase.

On negative news (Lockdown), the market formed a bottom in March 2020. If history repeats, the basic rule of technical analysis, the recent bottom on April 7, again occurs on negative news (tariffs). In all practical purposes, the 21,743 points, the recent low, may not be violated easily unless there is bigger negative news than the tariffs. The bear market rallies normally retrace about 50 per cent of the fall. The 50 per cent retracement level of the last 8 months’ fall is at 24,011 points. The Nifty bounced impulsively by 2,128 points or 9.79 per cent since the 7th April low. If the Nifty is able to close above, on a weekly closing basis, expect the new uptrend to begin. Watch the Weekly RSI to shift its range above 60 for confirmation. The weekly MACD already give a fresh bullish signal.

Nifty turned up from significant support (of confluence Fibonacci retracements – 23.6 per cent of the March 2020 low, 38.2 per cent, June 2022 low and 61.8 per cent of the 2023 Oct low. If Nifty reclaims its 40-week and 200 DMA, and trades above the 24,000 / 24,100 level, the balance of probabilities favours the end of the current correction. Then the Index is likely to start its ascend somewhat similar to the price action during the June 2022 – June 2023 period, which is like a Stage-1 base.

For the next week, the market may start with a positive note and may test the 200 DMA of 24,051 points. In such a case, the Index will form a higher high and get the signal for a confirmed uptrend. In a confirmed uptrend, investors must look for investment opportunities in the stocks. As the market is showing strength, a majority of stocks will move higher. Focus on good earnings growth and high relative strength stocks.

However, in a worst-case scenario, as the uncertainties in world trade and business environment still persist, Nifty must not violate the recent low. On the flip side, if Nifty turns down and trades below 21,743, a deeper correction can be expected. Before that, there were several supports for the Nifty. First, Friday’s low, which is also a 23.6 per cent retracement level of the last seven days’ move, is at the 23,298-370 zone, which is crucial. The 20- 50 DMAs zone of 23,170-22,970 is another zone to be watched. In any case, it declines below the 22,808-22,556 zone, which is 50 and 61.8 per cent retracement levels, which will confirm the reversal on the downside.

Overall, the market is stabilising with an improved bullish bias. Stay with cautiously optimistic view and protect the profits on the table. Focus on BFSI stocks, which are showing decent earning growth.