NEW DELHI: As many as 44 of the 50 Nifty stocks traded above their 200-day simple moving averages (SMAs) on Monday. For a similar number of stocks, their 50-day SMAs ruled above 200-day SMAs. This suggests the index is highly overbought and unsustainable in the short term, Phillip Capital said in a note.
History suggests whenever the market sees such a high percentage of stocks ruling above 200-day SMAs, the following period has seen a technical correction.
Phillip Capital says such a correction may last 3-5 months. In case this is a sideways correction, Nifty50 may move towards 17,800-16,300 levels, it said, and warned that a deeper correction can take the index towards 15,300-15,500 levels.
“In case of a sideways correction we see Nifty50 trading between 16,300 to 17,800 levels. The index will remain in a range of 1,500 points. In case of a zigzag correction the index is expected to correct towards 15,300-15,000 levels,” it said.
Mazhar Mohammad, Chief Strategist at Chartviewindia.in, said he does not read a higher percentage of stocks trading above 200-DMAs as a sign of an overbought market, but felt some healthy correction towards the key averages is all likely.
ICICIdirect said any near-term fall would be an opportunity to buy stocks. It said the index has been following a specific rhythm since April 2020 wherein the magnitude of each major rally has been around 33 per cent, containing in between corrective phases of 5-6 per cent.
The brokerage said the October 2020-February 2021 rally of 35 per cent was followed by a 9 per cent fall in the index. The June 2020-August 2020 rally of 34 per cent was followed by a 9 per cent correction in September 2020. The March-April 2020 surge of 32 per cent was also followed by a 10 per cent correction in May.
After Monday’s fall, the 50-pack index was still up 23 per cent in the ongoing rally since Nifty50’s April low point of 14,151.
Philip Capital advised investors to stick with winners. It said stocks that have given 2-3 times returns in these 18 months will give 10 times returns in next 2-3 years.
“We recommend holding on to the winning stocks. However, for those stocks which have not performed in these 18 months, we have serious doubts about their future sustainability and should be looked at. This correction is the right time to re-align the portfolio,” it said.
The brokerage, meanwhile, said the index remains in a multi-year bull run and the yearly charts suggest it can hit 23,000-25,000 levels by March 2023. ICICIdirect sees Nifty at 18,600 by 2021-end.
“We expect the market to maintain the rhythm of the past 15 months with the current upleg expected to mature around the 18,600 level. Therefore, temporary spells of volatility of around 5 per cent from here on would offer incremental buying opportunity,” ICICIdirect said last week.