Nifty oversold; holding 15400 to revive technical pullback

What’s Buzzing:

Equity benchmarks underwent a global sell-off as geopolitical issues led to a surge in crude oil prices. As a result, the index corrected 16% from lifetime highs of 18600 and approached oversold conditions. Has the structural uptrend reversed or should one buy the dip?

Context:

The ongoing elevated volatility is expected to settle down upon easing of the geopolitical situation and cool-off in crude oil prices post the outcome of Fed meeting. Technically, key support for the Nifty is around 15400. The ongoing correction has led a majority of stocks towards their long term supports making the overall setup more rewarding from a risk-reward perspective. We have presented our key insights from the historical behaviour of Indian equities post such uncertain times.

a) Over the past four decades, there have been three major instances of escalations due to armed conflicts (1991, 1999, 2001). While in the short-term, volatility remains high, eventually, such events have led to a durable bottom formation in equities once anxiety around the event recedes. Those bottoms have laid the foundation for the next major rally in equities.

Source:  Bloomberg, ICICI Direct Research

b) In the past two decades, in 16 out of 20 instances the index bounced from the vicinity of 52-week EMA with a temporary breach of not greater than average 5% during the panic. Investing around this long term average has been rewarding over three to six months. In the current scenario, we expect this rhythm to be maintained as the index has slightly breached below the 52 week’s EMA at 16350 along with oversold conditions.

Source:  SpiderSoftware, ICICI Direct Research

c) Meanwhile, sentiment indicator (percentage of stocks below 200-DMA) has approached the vicinity of oversold territory (recent reading of 27). Historically, durable bottoms have been formed in the index when the reading reaches around 20, indicating extreme oversold state of prices.

Source:  Bloomberg, ICICI Direct Research

Our Perspective:

We take cognizance of the above key facts and expect the Nifty to hold the key support threshold of 15400 as the current oversold conditions would act as catalyst for generating fresh buying demand once anxiety recedes. This is expected to set the stage for a pullback rally towards 16800 in the coming months. In the process, we expect IT, capital goods and metals sector to outperform while BFSI, auto and consumer discretionary are expected to witness stock specific movements.