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Sentiment at bearish extremes, technical pullback on the cards...

ICICI Securities 27 Jun 2022

What's Buzzing:

Equity benchmarks underwent a global sell-off as as downbeat global cues tracking anxiety around rising inflation globally, rate hikes weighed on investor sentiments. The index has already corrected 18% from the lifetime highs and approached oversold reading on weekly momentum oscillator. Can we expect a technical pullback from current levels?

Context:

We believe the benchmark has approached an important trough with strong support at the 14800-14600 zone. Currently, the index has approached oversold territory after seven month’s corrective phase amid weak global cues. Going forward, we expect the correction to be short lived and meaningful pullback to materialise in coming months. Our constructive thesis is anchored on following four factors:

a) the reading of percentage of stocks above 200 DMA below 15 signifies extreme pessimism in the markets that eventually leads to a technical pullback to the tune of minimum 10% in subsequent three months

b) The index has already corrected 18% from the lifetime highs and has approached oversold reading on weekly momentum oscillator. The weekly RSI has approached lowest level (placed at 35) since May 2020. Historically, reading of 35 on weekly RSI has produced decent pullback. We expect this rhythm to be maintained in the coming months.

c) India continues to relatively outperform the EM basket even in ongoing corrective phase despite significant selling by FIIs. Over the past one year while MSCI EM index has corrected over 40% from highs, India has relatively outperformed as the benchmark corrected only 18%.

d) The India VIX and crude oil prices have cooled off from recent swing high. Indian equities have an inverse correlation with India VIX. Thus, this provides impetus for acceleration of the ongoing pullback.

Our Perspective:

We expect the index to gradually resolve higher and extend pullback towards the 16600 region in coming months wherein strong support is placed in the vicinity of 14800-14600 zone, which we expect to hold as it is 80% retracement of CY21 rally (13596-18604), at 14600. In the process, we expect auto, capital goods, oil & gas and telecom sector to outperform while BFSI, IT and consumption are expected to witness bargain buy opportunities.

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