After a rally of 35 percent from lows of March 2020, market participants should not expect a run-away move on the upside.
Pritesh Mehta
The month of June has brought good tidings for Indian indices. A weekly gain of around 7 percent in the Nifty saw it closing above three-digit Gann number of 101(00).
It is also the point of polarity zone, as two bottoms were marked earlier (ie in March 2018 and October 2018). Sustenance above the same would result in a shift in the orbit on the upside towards 106(00) as per Gann parlance.
For market participants, it is now essential to focus on overall market structure which continues to be positive. Comeback of high-beta financials & banks, along with the continuation of a pickup in breadth in the broader market underlines market strength.
In such environment, pullback moves on the downside are likely to be short-lived. Post a rally of 35 percent from the low of March 2020, market participants should not expect a run-away move on the upside.
So far, it has all been about market rotation, as different sectors have participated in the current leg of the rally. However, breadth of the Nifty continues to hover above 90 percent mark (i.e. more than 90 percent of the Nifty components are trading above their 50-DMA), which implies possible short-term exhaustion.
We have created a customized index i.e. NiftyTop 11 index as per market cap-weighted method. This index includes 11 top weighted stocks within the index.
Together, these command over 60 percent weightage in the Nifty. Currently, this index is approaching 100-DMA, so a possible cool-off in breadth and time-wise correction is plausible.
Meanwhile, the weekly chart of the Nifty has formed a large bullish candle while on the daily charts there are multiple indecisive candles. Presence of such patterns after a swift rally usually results in price consolidation.
Ratio of Nifty Financial Services/Nifty staged a pullback of around 7 percent from the low of September 2018. However, it is approaching its four-year mean point of polarity zone.
A sharp pullback since last week indicates that ratio has taken support, but overall trend continues to be bearish as it lacks any follow-up movement on the upside as of now.
Meanwhile, 95 percent stocks of the Nifty Financial Services index are trading above their 50-DMA of June 4’s session. Breadth has picked up considerably in the last two weeks from 20 percent to 95 percent, implying overbought conditions.
However, just 5 percent stocks of the Nifty Financial Services index are trading above its 200-DMA, it implies that a massive turnaround is not seen despite a sharp rally in the index.
From here on, if a corrective phase (time-wise or price-wise) takes place, it is essential to identify outperformers and underperformers within this index. HDFC, HDFC Bank and ICICI Bank are likely to be potential outperformers.
(The author is Lead Technical Analyst - Institutional Equities at YES Securities.)
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