The benchmark Nifty 50 index has been drifting lower since February 16, 2021 when it recorded a high of 15,431.8. While there has been some recovery in the past few weeks, the real action has shifted to the broader markets. Lots of stocks from the mid-cap and small-cap sectors have continued to seek higher levels even as the Nifty 50 index has been struggling in a broad range.
The Nifty MidSmallCap 400 index hit an all-time-high of 8,822 on May 12, 20201. Let us assess the technical structure of this index to see if there’s room for a further rally.
To begin with, here is the Point & Figure chart of Nifty MidSmallCap 400 index with probable targets calculated using the Vertical Count methodology associated with Point & Figure charts.
The chart looks undoubtedly bullish with the price trading near all-time highs. As highlighted in the above chart, the target based on vertical count method works out to 9,055 and 10,081. These targets would be invalidated if the Nifty MidSmallCap 400 index closes below 7,250. From a short-term perspective a close below 7,950 would be an early sign of weakness.
Next, consider the relative strength chart of versus Nifty 50 index. Here is the relative strength chart of Nifty MidSmallCap 400 versus Nifty 50, captured in the Renko charting format.
This suggests that the Nifty MidSmallCap 400 index is comfortably outperforming the market benchmark. The above chart is in a strong uptrend with the price trading well above the moving averages. This confirms that the Nifty MidSmallCap 400 is outperforming the Nifty 50 index.
Third, take a quick look at the short-term breadth indicator of Nifty MidSmallCap 400 index. This metric corroborates the possibility of further rally in the Nifty MidSmallCap 400 index. The short-term breadth indicator – measured by percentage of stocks trading above their 50-day moving average – has recovered smartly from the oversold levels recorded last month.
As highlighted in the chart below, the Nifty MidSmallCap 400 got into a consolidation mode which helped the short-term breadth indicator cool off from overbought levels. The subsequent recovery in the price has been backed by a corresponding recovery in the breadth indicator. This a sign of broader participation of stocks from the mid and small-cap universe.
Fourth, consider the long-term breadth indicator, measured by percentage of stocks trading above their 200-day moving average. This indicator is also projecting a positive picture for this index. The current reading for this indicator is 84%, indicating that the majority of the stocks from the index are bullish and also trading above their 200-day moving average.
The only cause of concern is that this long-term breadth indicator reading of 84% can also be interpreted as a cautionary signal. With majority of the stocks already in the bullish zone, the breadth indicator has reached overbought levels. While this is not necessarily a red flag or a sign of potential reversal, it pays to be a little cautious about taking fresh aggressive exposures when the breadth is overbought.
The short-term outlook for the broader markets, represented by the Nifty MidSmallCap 400 index is bullish. There is a strong case for a rally to the immediate target of 9,055. Only a close below the recent swing low of 7,950 would be a cause of concern.
The overheated long term breadth indicator is a slight discomforting factor, but price can still progress higher while this indicator is in the overbought territory. There have been instances where the price has continued to march higher while the long-term breadth indicator was at elevated levels.
So, there is no reason to abandon your SIPs in mid or small cap-oriented funds. If you plan to take fresh exposures in the stocks from this space, be a bit cautious and take limited exposures owing to overbought breadth. As always have a clearly defined exit plan and more importantly stick to that plan.