Aditya Agarwala, Senior Technical Analyst, Yes Securities, expects the Nifty to continue the uptrend in the coming week but warns that the failure to sustain above 15,780 can lead to bouts of profit booking and a rise in volatility dragging the index to 15,700-15,550.
In an interview to Moneycontrol’s Kshitij Anand, Agarwala says the utilities and power sector will continue to do well as states roll back restrictions. Edited excerpts:
Another historic week for Indian markets with the Sensex and the Nifty50 hitting record highs again. What led to the price action?
The Indian benchmark index Nifty50 ended the week with a marginal gain of 0.82 percent, however, it did manage to close at a fresh all-time high and above the key resistance zone of 15,780.
Moreover, following a brief scare mid-week on concerns of rising inflation and subsequent corrective action taken by the central banks, Indian markets did climb the wall of worries to close at 15,800 levels as COVID-19 cases started to decline steadily and monsoon is expected to be normal this year, as predicted by the IMD.
A good monsoon will mean another year of bumper farm production and cascading positive impact for the economy battling COVID-19 infection.
Private weather forecasting agency Skymet made a similar prediction that the southwest monsoon would be normal at 103 percent of the long-period average (LPA). Rainfall between 96 and 104 percent of the LPA is considered normal.
Where do you see markets in the coming week? Which are the important levels to track?
The Nifty50 has managed to close beyond the key resistance hurdle of 15,780, which happened to be a 127 percent Fibonacci extension level which is a bullish signal.
However, it needs to be seen if the index manages to keep its head above this hurdle in the coming week for a continuation of the rally to levels of 15,860-15,950.
Failure to sustain beyond 15,780 may lead to bouts of profit booking and a rise in volatility, dragging the index lower to levels of 15,700-15,550.
Further, technical indicator RSI on the daily, weekly and monthly charts is still not showing any signs of negative divergence or having reached overbought territory, which could be a warning signal, therefore, index could continue its uptrend in the coming week.
Small and midcaps have also been participating equally in the rally. What is leading to the price action and what is the outlook?
Broader markets continue to outperform the headline indices as both midcap and smallcap indices added 2.90 percent to their tally in the week gone by.
This outperformance in the broader market space was mainly led by strong buying activity in the utilities & power stocks followed by healthcare and IT stocks.
Strong quarterly numbers from companies present in this space and rising demand for power and consumer durables as economic activities gradually resume kept market participants interested in many of these mid and smallcap stocks.
However, following the significant outperformance, both the indices are now approaching overbought territory and market participants should be cautious going ahead as bouts of correction in this space cannot be ruled out.
More than 400 stocks hit a fresh 52-week high on the day the Sensex and the Nifty hit record highs. Should investors pick stocks for trading where there is momentum, especially the ones that are hitting 52-week highs?
When markets are on a roll and hit fresh 52-week highs coupled with a large number of stocks also participating in the rally hitting 52-week highs it’s a sign of strength.
Momentum is usually strong in these stocks and market participants should use momentum as a key tool to pick up stocks and trade which can outperform the benchmark indices in a short span of time, helping them to generate an alpha over the benchmark Indices returns.
Sectorally, BSE utilities and power indices were the top gainers in the week gone by. What led to the price action?
Utilities and power sector stole the limelight in the week gone by as stocks within the sector soar led by strong volume-backed buying.
This price action could be attributed to the fact that power consumption will recover as businesses gradually reopen from localised lockdowns.
Further, top power-consuming states Maharashtra, Uttar Pradesh, Gujarat, and Tamil Nadu began easing restrictions on business operations from June 7 in light of the slowing pace of new coronavirus cases.
Moreover, this space as a whole was under-owned and due for a significant rally. This outperformance is likely to continue.
Top three-five trading ideas for the next three-four weeks?
Here is a list of equity recommendation for the short to medium term:
Mahanagar Gas Ltd: Buy| LTP: Rs 1,226| Target: Rs 1,330| Stop Loss: Rs 1,170| Upside 8%
The stock has resumed its upward journey after breaking out of a narrow consolidation pattern on good volumes. RSI has also turned upwards from the 58 levels, confirming strength dominant in the stock
Larsen & Toubro Infotech Ltd: Buy| LTP: Rs 4,175| Target: Rs 4,450| Stop Loss: Rs 4,000| Upside 6%
The stock has turned upwards after taking support at the lower end of a broad trading range.
Further, volumes have been good in the recent bull candles confirming the strength in the uptrend. RSI has also moved above the immediate hurdle of 64 confirming bullishness.
Dr Reddy’s Laboratories Ltd: Buy| LTP: Rs 5,451| Target: Rs 5,800| Stop Loss: Rs 5,250| Upside 6%
The stock has broken out of a key trendline resistance formed joining all major peaks on very good volumes, triggering the resumption of the uptrend.
Moreover, a sustained trade beyond 5,500 will take the stock higher to levels of 5,800. RSI is also suggesting a continuation of the uptrend in the coming sessions.
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