Chartist Talks: ICICI Securities' Dharmesh Shah advises not to panic amid Indo-Pak tension-led correction, steam still left in defence pack

We believe the index has formed a durable bottom around 22,000-21,800 zone as it staged a strong rally after resolving out of past two months base formation backed by faster retracement. Further, significant improvement in momentum as well as sentiment indicators suggest broader market participation that makes us believe, extended correction from here on owing to escalated geopolitical tension would help index to cool off overbought condition and gradually form a higher base which would pave the way for next leg of up move.

What is your Nifty strategy for next week, considering the current technical setup?

The index has been witnessing elevated volatility tracking geopolitical worries. However, one should note that over past three decades, there have been three major instances of escalations due to armed conflicts in India (i.e Kargil War, 26/11, Pulwama attack). On each occasion it formed major bottom once anxiety around the event settled down.

In the current scenario, post the knee-jerk reaction, we believe market will stabilise. Hence, we advise not to panic but rather build quality portfolios from medium to long term perspective amid ongoing earnings season as strong support is placed around 23200 zone. Eventually, we expects the index to resolve above immediate hurdle of 24,500 in coming weeks.

In a worst-case scenario, what levels should we watch on the Bank Nifty, and why?

The elongation of rallies followed by shallow retracement in Bank Nifty signifies, robust price structure. The recent up-move in Bank Nifty is larger (14%) as compared to that observed in previous month (9%) while correction has been shallower (4.5%) compared to early April decline of (6.5%). Additionally, the index is witnessing slower pace of retracement as it has retraced only 38.2% in last 12 trading sessions of the sharp up-move seen in preceding 9 sessions.

Going ahead, due to the escalation of geopolitical tension prolongation of correction cannot be ruled out wherein the strong support is placed at 52,000 which is swing high of previous months rally as well as 61.8% retracement of the recent up-move (49,156-56,098).

Do you see the possibility of a further correction in the Nifty Midcap and Smallcap 100 indices?

Historically, maximum average correction in Midcap and Small cap indices have been to the tune of 27% and 29% while time wise such correction lasted for eight to nine months. In current scenario, both the Midcap and Small cap index have corrected 23% and 29% respectively. Thereby approaching price wise correction. Meanwhile, time wise possibility of couple of months consolidation cannot be ruled out that would set the stage for next leg of up-move.

The Nifty IT index has been consolidating for a couple of weeks following a healthy recovery. Do you expect a high probability of a major breakout in the index?

Since CY-09, there have been 4 major instances where the IT index has arrested maximum price wise correction within 34%. In the current scenario, it has maintained the same rhythm as it staged a rebound after approaching price wise maturity of correction (33%) from the high of December 2024. Additionally, the recent higher high-low formation signifies the revival in upward momentum, making us believe that the index would eventually resolve higher post ongoing consolidation.

Do you think the Nifty Defence index is currently looking overbought?

The defence sector has witnessed sharp up-move in last couple of months tracking escalation of ongoing geopolitical tension. Hence, possibility of minor profit booking due to de-escalation of ongoing geopolitical tension cannot be ruled out. However, looking at the broader bullish structure we believe there is still steam left in the defence pack. Hence, any dip from hereon should not be construed as negative instead dips should be capitalized as a buying opportunity.

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