Chartist Talks: Why Sudeep Shah of SBI Securities sees Nifty IT putting up strong show in short term

Do you think the Nifty has entered the consolidation mode with support at 21,860 or there is a possibility of another round of correction up to 21,500 in the coming sessions?

Last week, ended March 15, after a rising channel breakdown in the Nifty on the daily scale, the index has taken support around 21,900-21,930 zone as it is the confluence of 50-day EMA (exponential moving average) and the prior swing low. Apart from Nifty index trading below its 20-day EMA level, the 20-day EMA has started edging lower.

The charts of large-cap stocks display a mixed picture in addition to some weakness being observed in the momentum indicators and oscillators for the Nifty. Hence, we feel that these factors are hinting at a possible consolidation for the Nifty in the near term.

The 21,900 - 21,850 zone will be a crucial support for the index. Sustaining below 21,850 will lead to an extension of the correction up to 21,500 levels in the short term. On the upside, the zone of 22,200-22,250 will act as an immediate hurdle for the index. Sustaining above the 22,250 level, the index would resume its journey up to 22,530-22,700.

Stocks that look structurally strong, especially after the recent steep fall...

Based on relative strength charts, large-caps such as Ambuja Cements, Bharti Airtel, Cipla, Colpal, HDFC AMC, Nestle India and TCS look structurally strong with promising signs of outperformance, while Persistent Systems, Dixon Technologies and L&T Technology Services look strong from the mid-cap space.

Also read: What should you do with your mid and small-cap holdings amid heightened volatility? Experts weigh in

Do you think the worst is over for midcap and smallcap indices?

After the fierce sell-off in the first half of the week ended March 15, the Nifty Midcap and Smallcap indices have seen minor pullback in the last two trading sessions. But the worst is not over. We feel underperformance in these indices when compared to Nifty would continue. One needs to be extremely stock-specific and choose the stocks wisely, which are structurally strong on charts backed by strong fundaments.

For the Midcap index, we feel that the 100-day EMA zone of 45,300-45,500 could act as an important support, while 47,400-47,500 zone would act as a potential resistance on the upside. The Nifty Smallcap index is relatively weaker than Midcap index. While the Midcap index is 6 percent down from its all-time high, the Smallcap barometer has corrected over 12 percent from its highs. We expect the index to consolidate negatively between 20 DEMA zone of 15,300 on the upside and 13,900 on the downside.

Also read: Keep your portfolio in green even when market turns red: Here's a blueprint from experts

Does the private bank index look better than the PSU bank index?

Looking at the ratio chart of Nifty Private Bank index to Nifty PSU Bank index, clear signs of outperformance by private banks are visible since past few trading sessions. Tracking the levels, the Nifty Private Bank index has key supports placed at 22,800-23,000 zone, which is the 200-day EMA Level as well as the upward sloping trendline zone.

The charts of heavyweight stocks such as HDFC Bank and ICICI Bank in the Nifty Private Banks index show promising signs.

PSU Bank Index, which has breached its recent swing low, needs to cross and sustain above its 10-20 EMA zone of 6,950-7,000 zone for it to witness a resurgence in momentum on the upside.

Which sector is entering in decisive breakout?

We anticipate that Nifty IT will show strong performance in the short term as it has rebounded from an important support zone of 36,600, which is 23.6 percent Fibonacci retracement level of recent swing up move from 30,054 to 38,559.

Additionally, during the recent downturn in frontline indices, Nifty IT has exhibited higher relative strength with the ratio chart of Nifty IT to Nifty forming a sequence of higher highs and higher lows since last five trading sessions indicating its potential for outperformance in the current market conditions. We believe, it is likely to test the level of 38,500 in short-term.

Your top two bets for the next week...

L&T Technology Services

On Friday, the stock has given Falling Wedge pattern breakout on daily scale backed by robust volume. The stock is currently trading above its short and long-term moving averages. The momentum indicators and oscillators are also supporting the overall bullish chart structure.

We recommend accumulating the stock in the zone of Rs 5,360-5,400 level with stop-loss at Rs 5,190 for a target of Rs 5,700, followed by Rs 5,850 in short-term.

Cochin Shipyard

The stock has rebounded from Rs 720 levels, which is 100-day EMA level as well as 38.2 percent Fibonacci retracement level of its prior upward move (Rs 430-941). While reclaiming its 20 & 50-day EMA levels, the rebound is also backed by volumes above 50-day average.

The daily RSI (relative strength index) has also given bullish crossover. Hence, we recommend accumulating the stock in the zone of Rs 890-880 with stop-loss of Rs 850 for a target of Rs 940, followed by Rs 960 in short-term.

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