Nifty: Nifty may again test support of 16,800, IT weakness could continue


Technical and derivatives analysts expect the Nifty to retest the recent support of 16,800 as weakness continues. Indian stock indices fell nearly 2% last week and underperformed most Asia peers amid fears of bigger rate hikes by the US Federal Reserve. Among sectors, information technology is likely to see more weakness going ahead, said analysts.


Where is the Nifty headed?

The overall trend of the Nifty is down. After a small bounce, it failed to sustain the highs of around 17,450, so the market could slide down to the recent support of 16,800 once again. One may expect another round of upside bounce from 16,700- 16,800 levels. 17,450-17,500 is going to be strong resistance on any upside bounce.

What should investors do?

Investors should stay away from long trading positions during this down market. They can create small positions at lower levels at around 16,700-16,800. It is not a time to be bullish as some more decline is on the cards. Sectorally, pharma, oil and gas, automobiles may outperform; while banking, metal and realty sectors may underperform. Minor upside bounce is likely in the IT sector.


Where is the Nifty headed?

Nifty has been making lower highs — lower lows in last two weeks and seen negative crossover on most of the mechanical indicators which indicates restricted upside and risk of retesting the recent swing lows. Now, till Nifty holds below 17,350-17,442 zones, weakness may persist for the short term for a decline towards 16,800 and 16,666 zones; while a decisive hold above 17,442 zones is required for any kind of stability in the market structure. Company specific triggers and movement based on result outcome could be seen with overall lackluster sentiment and dull move in the broader market by looking at price and data statistics.

What should investors do?

Investors can wait for more dips to add good quality stocks while traders are suggested to go for hedging or work on position sizing to deal with this volatile market. Hedging is also suggested with the view of some profit booking decline or capped upside in the broader market. One can go with Bear Put Spread by buying 17,150 Put and selling 16,650 Put to hedge the downside move towards 16,650 zones. Stock specific positive stance in selective auto, IT and energy sectors; while weakness could be seen in bank, financial services, metal and pharma stocks. Positive on L&T Finance Holdings, M&M, Maruti, ACC, Adani Ports and Asian Paints; while weakness could be seen in Hindalco, Cipla, Torrent Pharma, and Tata Steel, etc.



Where is the Nifty headed?

Given the weakness in global markets, Nifty could decline toward 16,600 in the short term. 16,600 is an important support level for the uptrend to resume. A deeper cut is subject to further weakness in US bond markets and the fallout of the bond market collapse. If 16,600 breaks, the risk of a fall below 16,000 would open up. Sector rotation has been quite high so far and sectors that have already corrected a lot might pick up momentum and help limit the downside of Nifty.

What should investors do?

Long-term investors should not be too concerned by the near-term volatility in the markets as we remain in a bull market. Sectors like auto stocks, power and PSU stocks might outperform in the near term, whereas IT and metals might remain weak. Tech stocks have been the worst hit this month but we cannot rule out some further decline in the coming weeks till the earnings season is behind us. There is a 7% downside risk to the Nifty IT index from the current levels. Once the correction is complete, we should see a more meaningful reversal to the upside from next month

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