Nifty may retest January high of 18350 soon, Bank Nifty may reclaim 39400; Buy Reliance, TCS, Axis Bank

By Dharmesh Shah

The Nifty 50 index opened gap-up (17670-17791) and achieved our target of 18100. However, profit booking from higher levels dragged the index below the 18000 mark. As a result, weekly price action formed a doji candle, indicating breather after a sharp rally. In the process, broader markets outperformed benchmark and accelerated its catch up activity.  

The index is resuming uptrend after undergoing a healthy retracement post 1100 points rally seen in just six sessions which has helped the index to cool off overbought conditions. Key point to highlight is that, the rallies are getting elongated followed by shallow corrections (not more than 3% in the ongoing rally), highlighting robust price structure. The current rally is supported by significant improvement in market breadth along with multi sector participation which makes us confident to believe index will resolve higher and challenge recent high of 18100 and eventually head towards January high of 18350 in coming weeks. Thus, temporary breather from hereon should be capitalised as incremental buying opportunities as we do not expect strong support of 17400 to be breached. 

Sectorally, IT will be in focus amid earnings while positive stance maintained in BFSI, PSU, Auto, Metals and Telecom. Our preferred large cap picks are Reliance Industries Ltd (RIL), Tata Consultancy Services (TCS), Axis Bank, Asian Paints, Bajaj Finance, Tata Motors, Tata Steel, ITC while Voltas, HAL, Bank of Baroda, Birla Soft, SRF, Graphite, Timken, Lemon tree, TCI Express are preferred in midcap category.

On expected lines, broader market indices accelerated catch up activity with its large cap peers. The current up move of ~18% in Midcap is larger in magnitude compared to December-January up move of 14%. Further, this rally is backed by improving market breadth as the percentage of stocks above 50-DMA of the Nifty 500 universe has soared to 78% compared to mid February (Russian invasions on Ukraine) swing high reading of 25%, indicating inherent strength that augurs well for durability of ongoing up move going ahead.   

Structurally, the formation of higher peak and trough on the weekly chart supported by improving market breadth signifies rejuvenation of upward momentum that makes us confident to retain support base at 17400 mark as it is 61.8% retracement of current up move (17004-18114), placed at 17428.

Nifty Chart

Bank Nifty Outlook

The Bank Nifty closed the week higher by more than 1.5% despite global volatility. PSU banking stocks outperformed with the PSU Bank index closing the week higher by ~4%.  The weekly price action formed a Doji candle with shadows in either direction which maintained higher high-low signaling continuation of the overall positive bias. 

Going ahead we expect the index to continue with its up move and gradually head towards the February 2022 high of 39400 levels in the coming weeks. Buy on dips strategy has worked well during the recent up move, which is likely to continue, hence the current breather of the last 3-4 sessions should not be seen as negative instead should be used as buying opportunity as we do not expect Nifty to breach support area of 37100-36700 being the confluence of the following observations:

(a) Last Monday’s bullish gap up area placed around 37100 

(b) The recent breakout area above last two week’s high is also placed around 36700 levels

In the smaller time frame the index has already taken four sessions to retrace just 38.2% of the preceding six sessions up move (35016-38765). A shallow retracement signals a higher base formation and an overall positive price structure. Among the oscillators the weekly 14 periods RSI has recently generated a buy signal moving above its nine periods average thus validates overall positive bias in the index

Dharmesh Shah is the Head – Technical at ICICI Direct. Please consult your financial advisor before investing.)

ICICI Securities Limited is a SEBI registered Research Analyst having registration no. INH000000990. It is confirmed that the Research Analyst or his relatives or I-Sec do not have actual/beneficial ownership of 1% or more securities of the subject company, at the end of 21/01/2022 or have no other financial interest and do not have any material conflict of interest. I-Sec or its associates might have received any compensation towards merchant banking/ broking services from the subject companies mentioned as clients in preceding 12 months.