MC Interview | 'Remain cautious as chances of record high in September may be certain if Nifty tops 18,300'

After an eight-week rally, the index registered a narrow-ranged Spinning Top, resembling body near its supply zone. This is the first week since the recent up move where the index closed the week near its lower shadow. With both its key trend strength indicators RSI (relative strength indicator) and ADX (average directional index) rebounding from their respective overbought zones, it is ideal to remain cautious as they warrant loss of momentum.

Also read - Rakesh Jhunjhunwala on his worst investment: 'I would encourage all to invest the most in that'

On the other hand, seasonality factor score indicates a tepid September after an extraordinary August with a negative factor reading based on the last five years of performance. Hence it is ideal to remain cautious as the probability of a record high in September would only be certain in cases the recent supply zone near 18,140-18,300 is negotiated well.

After looking at the IT index chart, do you think the index made a bottom last month and is preparing ground to make a smart move? Do you expect index to hit its record high by end of this year?

The Nifty IT index was one of the last indices to commence its corrective phase. The index registered its life high on January 4, 2022 at 39,446.70 with a classic candlestick reversal top formation of ‘Hanging Man’ on its daily scale. Since then, it continued to register a bearish sequence which followed until it hit the oversold zone on its weekly scale. The recent positive divergence followed by the ‘Double Bottom’ characteristics getting confirmed with breakout at 28,550 zone is good evidence of a reversal being established.

So yes, we do believe that the base formation around 26,200 zone looks durable for a sustained pullback rally which could eventually scale towards 34,380 zone (61.8 percent retracement level of its previous down move from 39,446.70 to 26,189.40). The level of 34,380 also coincides with the weekly gap area when the down trend witnessed acceleration in momentum. Hence, we don't expect the recovery for the IT index to be so robust that it hits record high by end of this year. But the ongoing up move may not witness any major distortion till 34,380 level is achieved.

On monthly charts, Nifty Bank index has respected its long upward sloping support trend line (adjoining March 2020 and June 2022), whereas also did break out long downward sloping resistance trend line (adjoining October 2021 and April 2022). Do you expect the index to hit record highs by Diwali?

The long upward sloping support trendline did provide the necessary support despite the minor distortion while the breakout above the sloping resistance trendline wasn't that swift. Since the index is now barely 2,000 points away from its life high the probability of a record high looks bright but the index should establish a consecutive weekly closing above supply zone around 40,160 first.

What are the charts of Midcap and Smallcap 100 indices telling you about further trend?

Both the indices have gained exactly by 19 percent in the recent rally but the chart structures for both are displaying a different story. Nifty Midcap 100 is just 4 percent away from its all-time high closing while Nifty SmallCap100 is 19.6 percent away from its peak closing.

This huge divergence is again a reiteration that dominance of large institutionally driven stocks with good earnings performance have been rewarded well especially where the investor confidence has been higher while most of SmallCap 100 stocks which generally constitute of weak hand investors are yet to register conviction trends.

Also, on the intermediate trend the Nifty MidCap100 has been scaling much higher than its 200 DEMA (days exponential moving average) zone while Small Cap100 is yet to break above it. Hence any rejection in trend from its near-term resistance would result into larger degree weakness in both the indices.

The Nifty Auto index, on the monthly charts, has seen a break out of long horizontal resistance trend line (adjoining December 2017 and November 2021) last month. Do you think the sector is marching towards 15,000 levels in coming months?

Auto Index has been one of the most consistent outperforming sectors since the pandemic bottom was hit in March 2020. With its monthly relative strength still below 70 & also below December 2017 price performance the chances are bright for this index to scale towards 15,000 soon.

Since the beginning of this 29 months rally, it has only witnessed one single meaningful price & time correction from November 18, 2021 to March 11, 2022; it could face some exhaustion towards 14,060 zone before it restarts its journey towards 15,000.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.