Indian equity investors have faced a challenging start to the year as Mr. Market has been unkind. Despite being the best performing market globally in CY 2022, the Indian market has been underperforming compared to global markets this year
In February, Nifty 50 breached its 200-day moving average and recorded its 9th straight red candle, indicating consistent downward movement. While a short-term rebound is possible, the sustainability of a rally and the market’s future remains uncertain. We will analyze Nifty and its constituents from a medium-term perspective.
On the monthly time frame, Nifty has recorded three red candles, and in the last 12 years, there have only been two instances (as shown in the highlighted circle) where a fourth red candle has been observed. This offers some relief to bullish investors. Additionally, last year, after three consecutive declines (Apr-Jun ’22), there was a strong recovery in July ’22. However, it does not necessarily indicate that the correction is over. Nifty’s critical support levels are around 17100-17200, followed by 16850. A weekly close below these levels could result in a sharp correction towards the 16000 mark.
The weekly chart indicates that Nifty’s closing price on February 28th was at a critical pivot point (horizontal pink line) and a significant support level, suggesting a potential bounce-back from these levels. However, the current price is below both the Ichimoku base line (Red line) and conversion line, and the conversion line is crossing below the base line, indicating a bearish crossover. Thus, any rebound may be short-lived. If Nifty reaches ~17700 in the rebound, it should be used as a shorting opportunity. Unless Nifty closes above ~17800, it is advisable to avoid long trades.
Daily chart is quite bearish with all components of Ichimoku trending downwards and Price is below the pivot. Important support at ~17060 and resistance at ~17550.
Now let’s look at how the key sectors and important Nifty constituents are placed.
Bank Nifty: Bank Nifty is a significant contributor to the Nifty, and its performance will heavily impact the behavior of the broader index. On the weekly chart, ~39700 is a crucial level that has been defended so far, and there has been no close below this level. However, if it closes below this level, it could signal a medium-term correction towards ~38500 and eventually 36500. On the upside, ~40600 and ~40960 are essential resistance levels. A change in the trend (medium term) will only be confirmed if Bank Nifty closes above ~41700-41800.
Nifty IT: Nifty IT has outperformed Nifty so far this year, but it has recently retreated from its critical pivot levels of ~31450. The first critical support level is around ~29000, followed by ~28000. If it falls below this level, it may retest the June ’22 and September ’22 levels of ~26300.
Nifty Auto: Although Nifty Auto is still in an uptrend, it has turned slightly negative this week. The critical support levels for Nifty Auto are ~12700 and ~11400.
Nifty Pharma: Nifty Pharma is already close to its Jun’22 low. It has broken its important support of ~11900 and is now likely to test ~11200. It’s a very bearish chart as of now.
Reliance Industries: Reliance also closed below its key pivot level of ~2368. If its weekly close remains below this level, then its possibly headed towards 2240-2200 levels
Nifty FMCG: The Nifty FMCG index is currently the strongest of all, and investors may consider using dips to accumulate stocks from this sector. The critical support level for Nifty FMCG is ~4450.
Nifty Metal: Nifty Metal is the worst performing index so far this year and the chart is very bearish. It may see Jun’22 low ~ 4500 soon.
Outlook:
While a bounce back is possible in March, the medium-term trend remains bearish. This is a critical moment to remember that “Cash is King.” There are high-yield bonds available in the market that offer a yield of 10% or more, which is an attractive option. Additionally, the Q4 earnings season is expected to continue the disappointing trend seen in Q3. With a current PE ratio of 20.5x, the Nifty is not particularly cheap, particularly considering the lack of strong earnings expectations and lingering inflation concerns. Another significant factor to consider is the upward trend in Indian government 10-year bond yields, which is not a positive signal for equity markets (see chart below).
Finally, an article published by Forbes has suggested that stock markets globally are at critical levels and may be at a high risk of collapsing in March. Although the article mainly focuses on the US market, it would be unwise to assume that the Indian market would remain insulated/decoupled from any such correction. For reference, the article is linked below.
