A couple of months ago, we had given an outlook for the Nifty 50. Today, we’re giving an update to that Nifty 50 outlook. Here is an extract from the previous update:
“…. This indicates that the index is getting ready for a corrective or a cool-off phase. This cool-off in breadth could play out either as a price correction where Nifty 50 could drop to lower levels or as a time correction where the price consolidates in a range. We could see a spike in volatility if a time correction were to play out.”
The time correction mentioned in the previous post played out and this phase was marked by a spike in volatility. So, let us do a status check on the current situation.
As always, let us begin with the bigger time frame by observing the Nifty 50 chart in the 3% brick size Renko chart format. Here is the chart.
As highlighted in the above chart, the Nifty 50 index has moved into a corrective phase when the Disparity Index (this measures the distance between the price and the moving average in percentage terms) has been at the elevated or overbought level of around 45%. Though the Disparity Index has subsided slightly due to the recent cool off in the index, it is still near overbought levels. This essentially means the threat of either a timewise or a price correction is not eliminated. But let us discuss two possibilities here.
Bullish Case Scenario
The recent price action is bullish with the Nifty 50 recording fresh all-time highs. The Disparity Index in the short-term time frame has cooled off a lot and is accommodative of a short-term bounce. This bullish case scenario can play out provided the overbought Disparity Index reading in the higher time frame (3% brick size in Renko) is resolved by a spike in momentum.
This would help let the Nifty 50 index march higher even as the Disparity Index stays in the vicinity of the overbought zone; i.e, the significance of Disparity Index as a factor would reduce a tad. If you look at the above chart, this scenario played out during June 2009 to November 2010. The deeper correction leading to a cool off in the Disparity Index happened after November 2010 high.
This is the best-case scenario that can be visualised. And the following short-term Point & Figure chart of the Nifty 50 index seems to be supportive of this bullish scenario.
There are two targets plotted in the above chart using the Vertical Count method in the Point & Figure charts. The targets are 16,695 and 18,630. These targets would be invalidated only if the Nifty 50 index closes below 13,600.
Until this swing low at 13,600 breaks, there will be a case for a rally to the targets mentioned above. As observed earlier, this is the best-case scenario and this looks like a probable scenario as well, based on the current market structure.
Let us take a quick look at the top 10 heavyweights of the Nifty 50 index. These top 10 stocks account for about 59% weightage in the Nifty 50 index. Out of these 10 stocks, the top three – namely, Reliance Industries, HDFC Bank and Infosys – account for about 28% weightage in the index.
The short-term technical outlook for Reliance Industries and Infosys looks positive. Based on the short-term targets for these stocks, there appears to be a potential for 5-8% appreciation in these. To some extent, this lends strength to the short-term bullish case scenario. Let us not forget that these stocks can move up but if others do not participate, the Nifty 50 index can still struggle or even slide to lower levels.
The outlook for the private bank heavyweights such as ICICI Bank, Kotak Bank and Axis Bank looks promising too. If these stocks begin to accelerate, the Nifty 50 index could comfortably head towards its target.
Let us look at the alternate scenario as well. In this scenario, the premise is that the index is still vulnerable to a downward corrective phase. The Disparity index in the 3% Renko chart (featured earlier) is the primary factor supporting this view. There are a couple of other breadth indicators that are at the overbought zone.
As this is not the preferred scenario, let us not delve deep into this possibility. This alternate scenario will come into play if the Nifty 50 index slides below 14,100. While a few may consider that this invalidation level is too far away from the prevailing index level, there is no better alternative for now.
We will have to wait for further price action to unfold to arrive at a better or higher invalidation level. For now, we have to live with 14,100. We will share an update if there is any change to our base case bullish scenario.
Here are a few suggestions to deal with the scenario
- Stay with your equity allocation. Stick to quality names and as always have a clearly defined exit plan for your holdings.
- While the preferred outlook is Nifty 50 seeking higher levels, it is pertinent to note that the mid and small cap stocks represented by the Nifty MidSmall400 Index is still outperforming the Nifty 50 index.
- Consult your financial advisor and diversify into quality mid or small-cap-oriented funds.
- I cannot emphasise this enough – have a clearly defined exit plan for your existing equity holdings and stick to it.
- Your regular SIPs need not be influenced by the observations made in this post.
Based on how the price unfolds, we will come up with an update if we sense a threat to the base case scenario.