Technical Strategy for June 2023: Nifty headed for lifetime highs, midcaps to outperform

Technical Outlook

Equity benchmarks extended gains for a second consecutive month gaining 1%, buoyed by improved market sentiments amid persistent FII inflow throughout the month. Consequently, the Nifty approached our targe of 18,500 as our buy on dips strategy fared well. As envisaged in our March monthly report, the stage has been set to challenge the all-time high in coming month.

Going ahead, we expect the index to resolve out of intermediate hurdle of 18,500 and challenge lifetime high of 18,900 in the coming month. Meanwhile, we do not foresee the Nifty breaching key support threshold of 17,800. In the process, we expect broader markets to accelerate upward momentum fuelled by 18 month’s consolidation breakout in Midcap index. Hence, dips should be capitalised on to build portfolio from medium term perspective.

Key themes/takeaways for coming month

Consolidation breakout confirms resumption of uptrend: Breakout from past four week’s consolidation 18,500-18,000 bodes well for acceleration of up trend.
Midcaps to maintain relative outperformance: The Nifty midcap index witnessed faster pace of retracement as it retraced past four month’s decline in just two months and approached near its all-time high. Further, the ratio line of Nifty midcap/Nifty 500 have recorded breakout from cup and handle pattern after five years, indicating acceleration of upward momentum in the broader market.
Improving market breadth displays broad based participation: The recent consolidation is on the back of improving market breadth as currently 60% of the stocks of Nifty 500 universe are trading above 200 days SMA compared to April end reading of 48%, highlighting broader market participation.
Constant buying spree of FIIs: FIIs inflows have remained sturdy in May(Rs 25,000 crore so far), which is a key supporting factor for acceleration of structural uptrend ahead.

Nifty: Index rhyming moves seen during CY13, CY16

Technical Outlook

We believe the current context is very similar to that of CY13, CY16 and CY18. In each of these identical instances, higher base formation consumed around three to four months and retraced preceding up move by around 50-60%, followed by new highs over next quarter (as shown in the adjoining chart).
In the current scenario, after four month’s decline the index resolved higher over past two months and now just shying away 2.5% from its all-time high. Hence, dips should be used as incremental buying opportunity to ride next leg of up move towards 18,900 in coming months as it is confluence of:

price parity of September-December rally 16,747-18,887 projected from March 2023 low of 16,828
implication of recent consolidation breakout 18,500-18,000
Formation of higher peak and trough on the monthly chart makes us confident to revise support base at 17,800 based on following observations:

38.2% retracement of current up move off March low of 16,828 is placed at 17,836
100 days EMA is placed at 17,844

Bank Nifty: Faster retracement signals structural improvement

Technical Outlook

The Bank Nifty gained for a third consecutive month as it continues to outperform the benchmark index and on expected lines tested the all-time high (44,151) during last month.
Key observation on the weekly chart of the Bank Nifty is that it has witnessed a faster retracement of the 14 week decline (44,151-38,613) during December 2022-March 2023 in just seven weeks. Faster retracement in just half the time interval indicating structural improvement from medium term perspective.
Going ahead, we expect the index to surpass its all-time high (44,151) and gradually head towards 45,400 levels in a non-liner manner in the coming month as it is 123.6% extension of the entire December 2022-March 2023 decline (44,151-38,613). However, after the recent sharp up move of 15% in the just eight weeks the weekly stochastic are at an overbought territory with a reading of 93. Hence, a breather of couple of weeks in the broad range of 44,200-42,500 cannot be ruled out. It should not be seen as negative. Instead dips should be used as buying opportunity.

Nifty Midcap Index: Eighteen month consolidation breakout to trigger acceleration

Small Cap index: Faster retracement indicating further catchup

Sectors in focus: BFSI, Auto, Realty, IT & Consumption

Outlook

Banking index maintained positive bias and continues to remain in outperformer quadrant. We expect the Banking stocks to continue their overall outperformance.
Nifty Auto index has rallied to an eight month high and currently placed at an all-time high with improvement in both relative and Momentum term. Auto Stocks are expected to relatively outperform.
The large cap IT stocks are witnessing pullback from key support, offering fresh entry opportunity with favourable risk reward set up. In our Relative strength model it is also placed at Bargain Buy quadrant.
FMCG index is placed at the outperformer quadrant (mainly lead by ITC). While other consumption stocks are seen resuming up move providing Bargain Buy opportunity.
Metals Index is currently placed at the Neutral quadrant and is likely to underperform the benchmark index in the coming month.

Sectoral indices – Relative to benchmarks

Relative Strength Comparative: Evaluating underlying strength

To closely gauge the underlying strength in respective sectors vis-à-vis the benchmark, we analyse the Relative Strength Comparative (RSC) indicator. As the name suggests, it is a comparative measure of strength vis-à-vis a benchmark or a sector.
While the RSC line is rising, the sector is outperforming the general market i.e. it is either rising faster than the benchmark in an up trending market or going down less, in a down trending market or even rising. While the RSC line is falling, the sector is underperforming the broad equity market. If the market is going up, the sector is going up less or may be even going down. If the market is going down when the RSC line is falling, the sector is going down more than the market. A flat RSC line indicates in line market performance going up or down by the same magnitude.
The purpose of this exercise is to identify those sectors that are outperforming and avoid sectors that are underperforming.

Technical Outlook – Pharma & Chemicals

Pharma, healthcare and chemicals sector lost momentum amid earnings impact and on relative basis continued to laggard.
The sector has been in broad consolidation for 20 months and indicate early signs of turnaround. In relative terms, however, the sector is expected to lag amid stock specific performance.
Technically, Divi’s Laboratories, Laurus Labs, Lupin, Syngene, Healthcare Global, PI Industries and Navin Fluorine look better.

Technical Outlook - Consumption

FMCG stocks have relatively outpaced discretionary peers over past few weeks while some discretionary names are also picking up steam.
In coming month, in relative terms we expect consumption to perform in tandem with benchmarks with some stock specific outperformances.
Technically ITC, Marico Industries, Titan, Astral, Trent, Havells, United Spirits, Jubilant Foodworks look better placed.

Technical Outlook - IT

The IT index is seen bottoming out in relative terms at its previous multiyear breakout level and expected to catch up some momentum from oversold trajectory.
Within sectors, few midcaps are expected to outperform while large caps, which are still oversold, are expected to pose technical pull back.
We like Reliance Industries, TCS, LTIM, HCL Tech, Persistent systems, Newgen Software, Birlasoft from risk-reward perspective.

Technical Outlook- Capital goods

Capital goods sector is turning stock specific after multi month of outperformance as some large cap names are expected to consolidate.
Broadly stock specific theme with focus on mid and small caps are expected to do well.
Within space, in terms of charts we prefer Elgi Equipment, Grindwell Norton, Anup Engineering, Transformers & Rectifiers and Tega Industries.

Technical Outlook – Oil & Gas

The oil & gas sector is expected to remain laggard in terms of relative performance amid stock specific action.
Going forward, we expect Gas distribution companies and some upstream oil producers to relatively outperform.
Stocks like Reliance Industries, ONGC, IGL provide favourable risk reward.

Technical Outlook - Metal

The metal index lost its shine as it continues to consolidate/correct.
In relative terms, the index ratio with benchmark is turning down from key hurdle indicating sector to continue to be laggard in short term while technical pull back from oversold reading is not ruled out.
Technically, Hindalco, JSW Steel, are preferred from risk-reward perspective.

Technical Outlook - Auto

The Auto Index has given a breakout from eight month consolidation amid broader participation from OEMs.
In relative terms, the ratio line is now trending up indicating relative outperformance to continue for several months.
Technically, Maruti Suzuki, Tata Motors, Eicher Motors, JK Tyres, Mahindra CIE, Gabriel India are looking good on price charts.

Technical Outlook – Realty & Infra

The real estate sector is seen resuming uptrend after almost 19 months of underperformance. Signs of interest rates peaking out helped sector to stage sharp rally indicating resumption of uptrend.
In relative terms, the ratio chart has given a breakout from eighteen months of declining channel indicating outperformance in coming months.
Within the infra space we like Ambuja Cement, DLF, Brigade Enterprises, based on price charts.

Source: ICICIdirect Research