Focus on midcaps for next few weeks

The out-performance of the broader market keeps the market with positive momentum and alive. Even though the majority ofStates are under lockdown, the market discounted the Covid impact. The Nifty benchmark index reclaimed 14800 and closed at 14823 with 192.05 points or 1.31 per cent. The BSE Sensex up by 0.9 per cent.

The Indian stock market's consolidation continued for the 53rd day in a downward channel. After several failed attempts to break the support and resistances, it once again reached the near resistance area at the weekend. It formed an evening star Doji candle on Friday, which indicates indecisiveness. And open and close below the 14760 levels on Monday is a negative sign for the market, as per the Japanese candlestick studies. It exactly closed at the resistance area. It formed a similar candle on 8th April, which is also at the 14880-resistance area.

In simple terms, there is no significant weakness technically. It may have indecisiveness, and we need a bearish confirmation signal. In fact, Nifty traded mostly within the last week's range. The weekly range reduced to 447 from 623 points last week. It is still below the rising channel support, which is acting as a resistance. At the same time, on a daily chart, it still within the falling channel. On a bull case scenario, Nifty has to break 14880-15044 zone of resistance decisively to turn bullish bias. The leading indicator, the weekly RSI is at 60.84. It has formed a higher low at 55.68. Watch this level for the next two to four weeks. So long as Nifty trades above this level, the market will either be neutral or bullish. On a daily chart, the negative divergence still present, a look for 56.61 - 58 zone will be crucial. A close above this zone and price breaking above 15044 is a very big positive for the market.The benchmark indices showing the sluggishness of the past three months. In comparison, the developed market is hitting the new highs, our market, after a 100 per cent gain in just 11 months, consolidating within five-seven per cent. For this small countertrend consolidating, it is consuming more time.

The seasonality charts also show the out-performance of midcaps in the month of May for 60 per cent of the time in the last 15 years. It's out-performance was mainly in April, 80 per cent which already witnessed. The other sector looking great in the current is consumption. Historically, this sector's out-performance comes in March, May and June months. So, these two are bright spots for the next few weeks. Within the consumption, the worst hit in the current situation is discretionary spending. Household essentials or FMCG will out-perform in near future. Apart from these, the pharma/healthcare, chemicals, sugar, and agri-commodity sectors are looking good.The Relative Rotation Graphs (RRG), which shows the sector rotation, the 11 weeks data (since 16th Feb top), also shows the Pharma, FMCG, IT are in the improving quadrant as they are moving towards the leading quadrant. Avoid BFSI, Auto and Realty for now. The benchmark index has a history, topping cycle in the Jan-Mar quarter. In the last 21 years, 16 tops occurred during the January-March quarter. The current top made at 15431 is on 16th February, it seems the topping cycle history is repeating. At the same time, the doubling factor is also haunting the market now. Historically, whenever the benchmark index rose by 100 per cent from the bottom, it corrected 20 per cent.

Even as the trend follower, so the Nifty is making lower tops and lower bottoms, it's not wise to invest by looking at benchmark. The 14880-15050 zone of resistance tested several times in the recent past and failed. If Nifty falls below the 14200-269 zone of support, all historical evidence will reconfirm the Jan-March topping cycle. Hence, focus on the broader market, particularly, midcaps for the next few weeks.

(The author is a financial journalist and technical analyst. He can be reached at [email protected])