Nifty set for rally towards 28,800 in FY26; these 3 sectors offer a favourable risk-reward setup

Nifty Uptrend

The Nifty 50 staged a strong comeback after setting a tariff bottom at 21,744 on April 7, recording a rally of more than 2,600 points (12 percent) up to an intraday high of 24,359 on April 23, reminiscent of the sharp upmove seen immediately after the Covid-19 lows in 2020.

The banking & financial services sector, with the biggest weightage in the Nifty 50, was the big driver for this upmove. This sector took a breather on April 23 after the consistent run up for more than a week (rising by around 7,000 points from April lows). Instead, the technology sector took the lead on Wednesday, clocking a more than 4 percent increase, helping the Nifty 50 continue its upward journey for the seventh consecutive session.

Technically, the index has already seen the 50 percent retracement of September 2024 high to April 2025 lows and is inching toward a 61.8 percent retracement of 24,545, which also looks possible soon.

This is not the endgame for bulls as the expected further rally has many legs given the easing tariff concerns and improving fundamentals of the domestic-focused economy with the hope of better earnings growth in the later part of this financial year, though bears, who had enjoyed their days during October 2024 to April (2025) first week, may try to disrupt intermittently going ahead.

According to an ICICI Direct report, the Nifty is set for upmove toward 25,500 in the coming couple of quarters, followed by clearing the previous record high of 26,277 (September 27, 2024) and beginning a further northward journey toward the new target of 28,800 before the end of the current financial year (FY26).

"Our statistical model suggests that a host of the negative news are now priced in and has entered base formation in the vicinity of 21,900-23,800 that would eventually set the stage for Nifty to head towards 25,500 in next two quarters," technical experts of ICICI Direct said.

According to them, the current strong recovery supported by positive divergence on the weekly chart, indicates that the bottom is in place. "In the current scenario, the combination of market breadth and sentiment indicators point towards pullback as all four components have seen significant improvement after recovering from bearish extremes," the report said.

In fact, the market breadth has been consistently dominated by bulls for more than a week now, and FIIs also persistently turned net buyers for last six sessions to the tune of Rs 21,264 crore, which significantly cut down the negativity spread at the beginning of April.

Empirically, buying in such a scenario has been rewarding, delivering an average return of 23 percent over the subsequent 12 months. Hence, dips should be capitalised to accumulate quality stocks to build a portfolio from a medium-term perspective, ICICI Direct advised.

Technical experts at the brokerage believe two years range breakdown in US Dollar index coupled with weakness in Brent crude oil price and cool off in S&P 500 VIX augurs well for pullback in emerging markets.

The US Dollar index, which had seen a death crossover with 50-day EMA crossing below the 200-day EMA at the beginning of April, remained under pressure, falling sharply from a swing high of 110.176 (January 13) to 97.921 on April 21 before showing a marginal upmove. Brent crude oil futures, the international oil benchmark, also saw steep correction, reaching $62.82 a barrel, a four-year low, this week, against $91 a barrel last April, amid concerns over demand and global growth worries post tariffs imposed by the US on all trade partners.

Meanwhile, as far as the midcap index is concerned, past two decades' data suggest that in a structural bull market, average maximum corrections have been to the tune of 27 percent that have offered incremental buying opportunity as it provides 28 percent in subsequent 6 months, said the ICICI Direct report.

The Nifty Midcap 100 index corrected 23 percent from its record high on September 23, 2024, followed by consistently rising since April lows. In fact, it recouped 17 percent from April lows. A similar situation was seen in the Smallcap 100 index which plunged 28.6 percent from a record high of December 9, 2024, and recovered 21 percent from April lows.

Sectorally, the brokerage advised that the focus should be on domestic themes rather than global wherein it expects Financials to continue with its leadership supported by PSU, Metal, Telcom, Pharma, and Consumption while IT, Capital Goods & Infra offer a favourable risk-reward setup.

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