"Breadth indicators of midcap and smallcap segments are approaching extreme levels. That indicates most stocks are bullish and it is a bullish sign," Prashant Shah, founding member and chief executive officer of Definedge Securities, says in an interview to Moneycontrol. But, he feels there is a possibility of a short-term correction or consolidation in midcap and smallcap segments. It will provide a better risk-reward trade opportunity in stocks, he says.
Shah, the Chartered Market Technician, believes the IT index is bullish on both price and relative strength charts, and corrections or bullish patterns are good trading opportunities as long as the IT index is above 31,200.
Q: Do you expect the current momentum to take the Nifty50 beyond 20,500 in September itself?
I will use a Point and Figure (P&F) chart to analyse Nifty because it is a very useful tool when it comes to analysing price patterns. Price is plotted in the 'X' column on the P&F chart as long as it is bullish. It remains in the same column until the 3-box reversal criteria is met. Therefore, price can remain in the same column for multiple sessions.
On the daily Point & Figure chart of Nifty, there is a single column of ‘X’ in the September month so far. This September single bullish column in Nifty has engulfed all previous 10 columns in the chart that have been formed since July 21, 2023. There is a strong multi-column (multi-swing) bullish pattern showing Nifty's strong momentum.
Short-term Nifty price will remain in this bullish column if it remains above 19,752 as per current levels. As the Nifty moves upward, the level will trail up.
The Nifty is outperforming Bonds, Gold, and the USDINR at the moment. Therefore, traders should look for breakout or pullback opportunities in equities. The most interesting formation in Nifty has been the outperformance of the midcap, smallcap, and microcap segments since its bottom formed in March 2023. The mid-small and microcap segments outperformed Nifty even during August when Nifty price corrected. That means largecap stocks underperformed during that period.
The Nifty is not at all-time high or if I consider its current level, it is about 5 percent above its previous important high registered in November 2022. The Nifty 500 index is at an all-time high and about 9 percent up from its previous high. Mid-Small 400 index is at all time high and more than 23 percent up from its previous important high. Microcap 250 index is also at an all-time high and more than 40 percent up from its previous high. This has been the strength of the recent Indian market rally. True strength is not reflected in the Nifty50 index.
Large caps seem to be joining the party now and the overall market scenario is bullish.
During my last interview with you, I mentioned that a first bearish signal in Nifty often turns out to be a bear trap formation. Nifty rallied well after that formation. Similar things have happened recently.
The current situation is that there is a tall anchor column (strong bullish trend) in the Nifty, midcap, smallcap, and microcap indices. That shows a strong bullish trend and momentum across all indices but because of that, the technical reversal levels are far from the current price.
Breadth indicators of all the market segments are extremely bullish indicating that most of the stocks are participating in the rally.
Price making high with higher breadth numbers (strong participation) is a strong bullish indication. However, breadth indicators are in the extreme zone that also indicates short-term exhaustion. Strong trends are usually followed by few narrow range or bearish candles. There is a possibility of some short-term correction or consolidation in the coming days.
There are open bullish counts in Nifty of 20,300 and higher. Short-term Nifty is bullish as long as it is above 19,530. Next bullish pattern in Nifty, after consolidation or correction that maintains 19,530, would offer better risk-reward proposition. Keep an eye on outperforming sectors and sub-sectors during the correction.
Q: Considering the consistent higher highs, higher lows formation on a weekly basis since June 2022, do you think there is a possibility of another 5 percent rally in the Bank Nifty, from here on?
Off late, the Bank Nifty has underperformed. I prefer to avoid underperforming sectors especially when the momentum in Nifty itself is strong. There is a base breakout pattern in Bank Nifty and it will remain bullish if it sustains above 44,800. It is expected to gain momentum above 45,500. Until then, look for other sectors contributing to the upward trend.
Q: Nifty IT has broken its horizontal resistance trendline on the weekly basis in the passing week. So, do you see the index gradually moving towards 35,000 and can the index achieve its previous record high in the current year itself?
The IT Index outperformed Nifty during August when Nifty fell. I call this a Lion relative strength pattern. When the denominator falls and the numerator is rising, it is a lion pattern during that period. Lion pattern sectors are expected to do better when the Nifty does well.
From that perspective, IT is a bullish sector. There is a major multi-column breakout pattern in the IT index. It has breached the highs of the April 2022 column in the P&F chart. But most interestingly, it is above all bearish 45-degree trendlines plotted from the major tops on the P&F chart. I call it an all-time-high-trend-line breakout pattern. This is a strong bullish pattern that indicates a new price territory for the IT index. In summary, IT index is bullish on both price and relative strength charts, and corrections or bullish patterns are good trading opportunities as long as the IT index is above 31,200.
Q: Do you think the ongoing consolidation in the Nifty Pharma index for the last five weeks will breakout on the higher side with 16,000-17,000 as the target?
The pharma index is bullish and outperforming the Nifty index. I expect much higher targets than what you mentioned. In the short-term, it is expected to mark a continuation breakout pattern sooner or later. Consolidation can last long if the index falls below 14,900.
Q: Two sectors on your radar that can give double-digit return by September-end?
Public sector (PSE and CPSE index) are strong sectors and outperformers of the current leg of the bullish trend. Realty and Infrastructure index are among the outperformers of this entire rally in Nifty, and they are expected to do well. Media stocks appear to be a dark horse sector and are expected to perform well over the medium term. The consumer durables sector is also looking good.
Q: Are the Nifty midcap and smallcap indices looking overbought now?
As mentioned earlier, the midcap and smallcap segments are outperformers of this rally. They are in strong trend and momentum. The dynamics change during such scenarios. In such conditions, the usual parameters of 'overbought' or 'oversold' don't work, and the technical parameters or the reading of indicators need a tweak. Scrips keep registering overbought marks and tend to stay in that zone during strong trends. It is not a wise idea to seek overbought levels in such scenarios.
Having said that, the breadth indicators of these segments are approaching extreme levels. That indicates most stocks are bullish and it is a bullish sign. But there is a possibility of a short-term correction or consolidation. It will provide a better risk-reward trade opportunity in stocks.
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