Nifty erases early gains; heavy short build up and relative weakness signal short-term consolidation

Analysts recommend avoiding mid- and small-cap stocks for now, as they may continue to face heightened volatility and downside risk

Indian benchmark indices cooled off after a strong gap-up opening driven by the Federal Reserve's overnight 50 bps rate cut. In afternoon trade, the Sensex was up 203.95 points or 0.25 percent at 83,152.18, and the Nifty gained 26.1 points or 0.1 percent, closing at 25,403.6.

However, the broader market faced selling pressure, with the Nifty Next 50 and the Nifty Midcap Select declining by 1.45 percent and 1.28 percent, respectively.

According to experts, the markets are showing signs of weakness, with heavy short positions building up in several stocks. The FMCG sector is expected to demonstrate resilience and provide support to the market. Analysts recommend avoiding mid- and small-cap stocks for now, as they may continue to face heightened volatility and downside risk.

“With midcaps and smallcaps having rallied significantly over the past few months, their margin of safety, in terms of valuations, has diminished relative to large-caps. Given this, the broader market may undergo a period of time correction in select pockets, with flows likely shifting towards largecaps," said Neeraj Chadawar, head of fundamental and quantitative research at Axis Securities.

Nifty Outlook and Strategy

Preeti K Chabra, Trade Delta

Nifty is trading at an all-time high following the Federal Reserve’s 50 bps rate hike. With the event now behind us, the market seems to be taking a breather, with profit booking seen in several counters. The RSI on the monthly chart is in an overbought zone, signaling potential selling momentum in the medium term.

Strategy: Once the 20-hour moving average breaks, a debit spread can be initiated in Nifty by buying the 25,300 PE at Rs 104 (for the 26th September expiry) and selling the 25,200 PE at Rs 80, with a net cost of Rs 20.

Sheersham Gupta, director and senior technical analyst at Rupeezy
The US Federal Reserve surprised the markets with a 50 bps rate cut, the first in over four years. Importantly, the Fed’s greater confidence in inflation nearing its 2 percent target suggests the possibility of a rate cut cycle in India, which has lagged behind the US and Europe in easing monetary policy.

With the festive season approaching, positive sentiment is expected in Indian markets, which typically experience a bullish trend during this period. Although profit booking occurred following today’s gap-up opening, it appears to be a mild correction.

Nifty has strong support at 25,350, and that level needs to be broken for further downside. On the monthly chart, Nifty has formed four consecutive green candles—a rare pattern—indicating limited movement until the next expiry. A breakout following consolidation could push Nifty towards the 26,500–27,000 range.

Strategy: The metals sector looks promising, as it is trading at historic lows compared to the Nifty. Tata Steel is a standout pick, with a stop loss of Rs 147.8 and a target of Rs 151.

Santosh Pasi, derivatives trader and founder of Pasi Technologies

Today after Fed's 50 bps cut, everyone was assuming it would go up. But because of profit booking, we are closing red candle today, however if we compare it with yesterday, it is closing slightly positive. Our economic factors are positive and we expect the bullish moment to continue. On any correction, it will be an opportunity to add in the long term portfolio.

Sudeep Shah, DVP and head of derivative and technical research at SBI Securities

Initially, the market rallied on positive sentiment following the rate cut, but as the session progressed, profit booking set in, with many investors opting to lock in gains.

Looking ahead, the 25,150–25,050 zone will act as immediate support for the Nifty, being the confluence of the 20-day EMA and the 61.8 percent Fibonacci retracement level of its prior rally (24,753–25,611). On the upside, the 25,600–25,650 range will serve as immediate resistance. We expect the index to consolidate between 25,650 and 25,000 over the next few sessions.

Bank Nifty Outlook 

Shah highlights that Bank Nifty is outperforming the broader indices, demonstrating relative strength. "While there has been some minor profit booking from higher levels, the overall chart structure remains bullish, indicating further upside potential. Immediate support lies in the 52,600–52,500 range, and as long as Bank Nifty holds above 52,500, it is likely to continue its upward trajectory, potentially testing 53,500, followed by 53,900 in the short term, " he added.

Going forward, Shah recommends focusing on the Banking and FMCG sectors, as they are showing resilience despite broader market weakness.

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