MC Interview | Prashant Shah of Definedge bullish on these 5 sectors for medium term

On the 0.10 percent daily P&F chart of Nifty, a double top buy pattern (basic bullish pattern) was first triggered at 17,156 on March 31, 2023. Following that, the first double bottom sell pattern (basic bearish pattern) was triggered on June 23, 2023. Hence, this is the first bearish signal in this strong bullish trend.

My experience indicates that the first bearish signal in a strong bull market often turns out to be a bear trap. It is possible that there will be some correction or consolidation followed by a resumption of the trend.

Nevertheless, bulls should exercise caution if the price falls below 18,550 since it will be below the moving average.

You can see in the chart that the first vertical count of 18,733 placed at the bottom of 16,950 has been closed (achieved). In fact, it indicates the strength of the trend. The second count is open. The approach should be to trade bullish patterns in the direction of this count unless the opposite count is triggered.

The breadth indicators were overheated and are now in a correction mode. Extreme breadth indicators suggest strong participation across stocks, which is a positive sign. It is healthy to have a correction after such occurrences.

Q: Will the Nifty Midcap 100 and Smallcap 100 indices be star performers by end of this calendar year?

The Nifty Midcap 100, Smallcap 100, MidSmallcap 400, and Microcap 250 have been the clear outperformers of this rally. With strong anchor columns of Xs, the relative strength charts for smallcaps and microcaps have surpassed all-time highs. That shows a strong performance trend and breakout.

In my approach, one should be active in the midcap and smallcap segments whenever there is a strong pattern breakout on their relative strength charts.

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Strong anchor columns (indicating strong momentum and trend) suggest this trend is here to stay for a while. As long as the relative strength chart indicates a bullish formation, I recommend remaining active in this segment. A ratio chart can also be used to compare these segments to the Nifty.

In the context of the strong performance scenario in midcap stocks, when breadth is supportive, most stocks participate in the rally. Even picks that are not so carefully analyzed also perform well. Hence, they say, the bull market produces many analysts. I recommend investing in companies with better fundamentals that outperform their indices on RS (relative strength) charts.

Unless you are investing for your grandchildren, you should exit the market when these indices begin to underperform. In most cases, markets recover, but portfolios do not because you are stuck holding stocks you do not know how to exit.

Q: Do you think the Nifty Pharma seems ready for march towards its record high this year, especially after consolidation seen since October 2021?

Pharma index reached a high of around 14,800 during October 2021. It has been in a downward trend since then and made a significant bottom around 11,600 during March 2023.

For three important reasons, I am bullish on the Pharma index.

Upon forming a bottom, the number of boxes of Xs on P&F charts or bullish bricks on Renko charts is greater than the number of bearish prints, indicating a reversal of the trend. Strong anchor columns (strong momentum) are formed after price hits this bottom – it is a positive sign.

The price is above the bearish trendline that has been drawn from all important tops during the fall. For me, this suggests that the index is in new territory.

The breadth of the Pharma index has been bullish. More than 70 percent of stocks are trading above their 50-day moving average. P&F X% breadth reached 100 percent a few days ago - it is a positive sign.

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These suggest that the index can perform from here if 12,500 is maintained. The view will get negated if bearish prints increase and price falls below the anchor column.

Q: Do you think Bank Nifty will get into momentum soon, to surpass its recent record high?

The Bank Nifty is moving more or less in line with the Nifty. Usually, the divergence between them is short-lived. On the higher degree of the Bank Nifty chart, I observe a strong ABC pattern (rally-consolidation-breakout). A triangle pattern can be seen on short-term charts. It is expected that the price will regain more momentum above 44,000. 43,100 – 43,300 are short-term support areas.

Q: The sector or stock that you are super bullish on?

I analyse sectors based on their price trend, performance trend (relative strength analysis) and breadth (participation trend of stocks in the sector).

I am bullish on the Auto sector. On the relative strength chart of the Auto index, there is a four-year breakout. Additionally, the index is near an all-time high. The breadth has remained positive.

I am also bullish on the Realty sector. Two-year correction turned positive on RS and price charts during March 2023. Breadth has remained positive, and bullish patterns have formed on the upside.

In this uptrend in Nifty, the Auto and Realty are among the leading sectors. If the Nifty trend remains positive, they are expected to continue to do well over the medium term.

In addition, I am bullish on the FMCG, healthcare, and infrastructure sectors. FMCG is also one of the leading indices in this rally. Relative strength charts for the Healthcare and Infrastructure index show signs of strong trend reversal. That indicates outperformance.

In the medium term, these sectors look promising. Look for bullish pullback trade opportunities in these sectors during corrections. Avoid them if the Nifty turns bearish. The strength of the underlying or denominator (Nifty in this case) is one of the major principles of relative strength analysis.

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