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Volatility to endure ahead of Monthly expiry; Eyes on Q3 earnings & Union Budget 2026!

ICICIdirect Research 23 Jan 2026 DISCLAIMER

Indian equities concluded the volatile week on a negative note to settle at 25054, led by persistent global uncertainties. The Nifty declined 2.50% for the week and closed below 200-day EMA. Except for Metals, all sectoral indices ended the week in negative territory, with Realty and Consumer Durable leading to the decline, highlighting broad-based weakness.
Notably, Index has respected its 52-week EMA (24988) which has been held since April 2025, indicating key average support, thereby sustaining this key support on closing basis  would keep the pullback option open towards previous swing high 25,400 with strong support is placed at 24700-24400 coinciding with the former higher-bottom support established during Aug-Sep 2025 period.
Going ahead markets are likely to witness heightened volatility in the coming week amid Pre-Budget positioning and the monthly derivative expiry as these are likely to dictate the trend for the final week of January.
FIIs have been largely selling in the Derivatives segment as well and their net short positions in index futures has reached to new peak(~2.2 lakh contracts). Ahead of monthly settlement and upcoming budget, we don’t expect them to carry such heavy short positions into this important event. Hence, a round of short covering shouldn’t be ruled out. Moreover, any positive catalyst for markets may resume inflows into specific large-cap segments.
 
On a broader market front:
Historically, bull-market corrections in the Midcap index have been capped around 27% and have lasted close to 17 months. In the current phase, the index has already corrected ~23% from the September 2024 peak, with nearly 15 months of time-wise adjustment completed. This suggests the correction is nearing maturity, with stabilization and a gradual recovery likely during March-April 2026.
Meanwhile, the Smallcap index has declined ~7% so far this month and is trading below its 52-week EMA, with a majority of small-cap stocks also positioned below their 200-day EMA. As a result, small caps are likely to underperform relative to midcaps and large cap in near-term.
 
Our positive bias is further validated by following observations:
On a market breadth front, historically whenever net of advance decline of Nifty 500 approached towards 450-470 levels that has been associated with capitulation and panic driven selling to form a short-term bottom.
In this week net A/D of index has reached 440 level suggesting markets are likely to form short-term bottom and see a gradual recovery in next couple of weeks.
 
Key Monitorable:
a)    Q3-FY26 earnings trajectory
b)    India-EU Trade Deal
c)     Fed Policy
d)    USDINR clocked a fresh all-time high $91.74. Further rise in USDINR bodes negative for domestic market

Gold: With > 90% up move in this year and approaching towards the psychological mark of 5000 $  the monthly RSI at 95 levels for the first time since 1980. Such overbought conditions suggest possibility of short-term breather cannot be ruled out

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