Nifty may consolidate around 11,600 levels; buy these two stocks for the medium-term

The Nifty has rallied more than 950-points over the past four weeks, leading the daily stochastic oscillator to hover in the overbought trajectory (at 86), suggesting the possibility of a temporary breather cannot be ruled out.

Going forward, we expect the index to consolidate in the broader range of 11,600–11,400, amid stock specific action, which will make the market healthier.

Hence, any temporary cool-off towards 11,400 should be used as an incremental buying opportunity, paving the way for the next leg of upmove.

On expected lines, the Nifty Midcap and Smallcap indices extended gains over four consecutive weeks, leading to the faster pace of retracement of the last leg of decline, denoting a structural turnaround, boding well for the next leg of the upmove.

We view the breather in the last six sessions as a secondary phase of consolidation and an integral part of the primary uptrend.

Thus, corrective declines should be capitalised on as an incremental buying opportunity given that the broader structure remains positive. Correspondingly, both indices have maintained the rhythm of not correcting for more than 14 months each since inception.

Also, the Nifty Midcap index has bounced from its 200-week Exponential Moving Average (EMA), which makes us believe that both indices have approached maturity of their price-wise, time-wise correction.

Here is a list of top two stocks, which investors can look at for a period of one-to-six months:

Kansai Nerolac Paints: Buy| LTP: Rs 459| Target: Rs 550| Stop Loss: Rs 405| Upside – 20%| Time Frame 6 months

The share price of Kansai Nerolac Paints is at the cusp of a falling channel breakout containing entire decline since high of Dec’17 (Rs 614) signalling a reversal of the secondary corrective trend and offers fresh entry opportunity for the next leg of the upmove.

The stock has already taken 14-months to retrace just 80 percent of the previous 12 month’s up move from Rs 319 to Rs 614, a slower retracement of the previous major rising segment signals positive price structure and indicates strength.

The short-term support for the stock is placed around Rs 405 levels as it is the 61.8 percent retracement of the previous up move Rs 343 to 499.

We expect the stock to resolve higher in the coming months. The favourable risk-reward set-up offers a fresh entry opportunity for upside toward Rs 560 as it is 80 percent retracement of the entire decline (Rs 614 to Rs 343).

Sobha: Buy| LTP: Rs 457| Target: Rs 492| Stop Loss: Rs 422| Upside: 7%| Time Frame 14 days

The share price of Sobha is at the cusp of a breakout above the last four week’s consolidation range of Rs 459-427, thus offering a fresh entry opportunity to ride the next up move in the stock.

During the current week, the stock has rebounded from the major support area of Rs 425-430 as it is the confluence of the following:

a) major trendline support joining the lows of November 2016 (Rs 216) and October 2017 (Rs 383)
b) the 200 weeks EMA
c) 61.8 percent retracement of the previous up move (Rs 380-514)

The stock has formed a higher trough in the weekly chart and is likely to resume a fresh up move. Among oscillators, the weekly 14-periods RSI has generated a bullish crossover above its nine periods average, thus supporting the positive bias.

We expect the stock to resolve higher and head towards Rs 496 as it is 80 percent retracement of the last corrective decline (Rs 514-426) placed around Rs 496 levels

(The author is Head Technical, ICICI Direct.com Research)

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