Technical Indicators Suggest Consolidation, if not Major Correction!
The Sensex has rallied by more than 10 per cent in November even as a majority of the technical indicators suggest that the markets are in an overbought zone in the near term. Although the bullish structure of the market is intact, in the near term the stock prices are a little stretched in certain pockets. The broader markets are showing remarkable strength, especially the Nifty Mid-Cap 100 index. As on Wednesday, the Mid-Cap 100 index gained for the 14th straight session, resembling the 2017 Bull Run of mid-caps. This longest stretch of positive closings is rare in recent history.
As of Wednesday, the Mid-Cap 100 index is trading 7.03 per cent above the 20 DMA. This also shows an extended rally. In recent history, the benchmark index did not go beyond 7.22-8.21 per cent. On Thursday, the index halted its winning streak and formed a shooting star pattern. In technical analysis this pattern is considered as a reversal pattern. However, the index managed to close above the prior bar low. We expect the Nifty Mid-Cap 100 index to enter into a counter-trend rally or maybe a consolidation phase and this would be the right time to grab quality stocks in the Mid-Cap 100 index, especially recommended for those who missed the bus.
We expect Nifty Mid-Cap 100 index to do well going forward, both in the near term as well as long term. What this recovery has done is that it has placed several underperforming, battered stocks above their respective 200 DMAs and that is a good sign for the bulls. With more and more stocks crossing their 200 DMAs, the quality of rally can be said to be very good. Hence, investors and traders can focus on broader markets for outperformance in the coming days. Globally, the markets have been retreating as the fears of shutdown gain steam amidst the rising number of corona virus cases both in Europe as well as the US.
The enthusiasm about the vaccines seems to be fading away. Hence, investors should remain cautious regarding the markets and stay light. Stock-specific action is warranted with broader markets expected to reward investors. The focus may also shift back to the IT stocks and pharmaceutical companies as defensives tend to do well when markets get into a correction mode. With markets getting into such a consolidation mode it is important that investors take some profits off the table and try to rotate the sectors to bet on.
The current rally is liquidity-driven and the same can be gauged from the fact that the FII have pumped in a massive Rs 42,390 crore month-till-date further supported by a strong set of numbers (earnings) and more importantly a changing sentiment as the festive season has brightened the prospect of speedy recovery. Even global brokerages such as Nomura Financial Advisory and Goldman Sachs have set a target of 13,640 and 14,100. Further, Goldman Sachs has also upgraded India to ‘overweight’ from ‘market weight’. Investors ought to bet on those stocks that are showing good buying interest and have also come out with betterthan- expected numbers.
Companies with positive management commentary can also be looked at for further analysis. The confidence of PE investors in the lending business is comforting for market participants and augurs well for NBFCs. Investors can lighten their positions in private banks that have run up a lot and can identify opportunities in the financial space which are yet to participate in the current market rally. The real estate stocks are showing good buying interest along with FMCG stocks. FMCG being a defensive bet can be looked at closely when the markets aim to consolidate a little bit. At this moment no leverage is recommended. For Nifty the key support is 12,735 while the key resistance level remains 13,000 – 13,200. For Bank Nifty the key support area remains 28,600- 28,400.
