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Beyond bellwethers: What charts foretell for other stock indices

Yoganand D BL Research Bureau | Updated on July 11, 2021

What do indices other than the Nifty and Sensex say about market direction? We take stock of the key levels to watch out for, based on technical analysis

Will the Indian stock market crack after its breathless bull run since last year or does it still have some steam left? Most investors with equity portfolios are pondering over this question today, to make decisions on whether to book profits or add to their equity positions.

While fundamental and technical views on the Nifty and Sensex are plentiful, there’s not much analysis on what’s going on outside of these indices. We decided to use technical analysis to take stock of the indices beyond these two bellwethers to gauge their direction. Whether you’re a passive investor with exposure to Exchange Traded Funds (ETFs) mirroring these indices or an active investor with investments outside the index stocks, you’ll find the views here useful. Here is the medium-term technical analysis-based outlook for some of the widely followed indices.

 

Nifty Next 50 (38,919.9)

The Nifty Next 50 index is also known as the Nifty Junior. It includes the next 50 companies by free float market capitalisation traded on the exchanges, after top Nifty 50 companies.

The Nifty Next 50 is preferred by investors on two counts. It is seen as the Nifty 50 incubator, that is, some of the stocks in the Nifty Next 50 have the potential to enter the Nifty 50 basket, which usually results in some re-rating. At the same time, Nifty Next 50 stocks are not as widely followed and tracked as the Nifty 50 and therefore may offer buying opportunities if they are under-valued or under-researched. The Nifty Next 50 tends to be a ‘high-risk-high return’ index rewarding investors better than the Nifty 50 during uptrends but also losing more during bear attacks.

After following a range-bound movement in the years 2018 and 2019 between 25,000 and 31,600, the Nifty Next 50 fell through the lower boundary in early 2020 and registered a multi-year low at 18,384 in late March 2020. Subsequently, the index changed direction and started to trend upwards. Since then, the Nifty Next 50 index has been in a long-term uptrend. The index surpassed key resistances at 25,000 in June 2020 and 31,600 in December 2020, which turned into a support and cushioned the index in January this year.

The index has been in a medium-term uptrend since then. After taking a breather in March, it resumed its uptrend to record a new high at 39,399 in early June and began to move sideways once again. In late June, the index took support at around 37,800 and bounced up. A decisive break above 39,250 can take it higher to 40,000 over the short to medium term. Inability to move beyond 40,000 can keep the index in a sideways path between 38,000 and 40,000 for a while.

On the downside, the significant medium-term support at 35,350 would be the key level to watch out for, if it conclusively breaks below the vital base level of 38,000. A minor pause at 36,500 is possible while trending downwards. The weekly relative strength index is displaying prolonged negative divergence, implying that a potential trend reversal is on the cards. Next key supports below 35,350 are at 34,300 and 32,870. Index funds or ETFs that are benchmarked against the Nifty Next 50 are Nippon India ETF Junior Bees, SBI ETF Nifty Next 50, UTI Nifty Next 50 ETF, Aditya Birla SL Nifty Next 50 ETF, ICICI Pru Nifty Next 50 ETF and Mirae Asset Nifty Next 50 ETF, among others. They have delivered similar returns of about 48 per cent over the past one year.

Nifty Next 50 (38,919.9)

Resistances: 39,250 and 40,000

Supports: 38,000 and 36,500

Bank Nifty (35,071.9)

Banking stocks are the barometer of the economy and tend to outperform during growth phases while lagging during slowdowns. It is, therefore, no surprise that the Bank Nifty is a favourite with derivative investors and momentum traders. The Bank Nifty features 12 leading private and public sector banks. The index has returned 53 per cent in the last one year.

Following a sharp fall in early 2020, the index found support at around 17,150 in late March 2020 and mid-May 2020. Thereafter, it reversed direction and has been in a long-term uptrend. After testing resistance at 37,500 in early February this year, the index witnessed a short-term corrective decline that got arrested at 30,405 in April this year. Since then, the index has been in a short-term uptrend. The index now faces a key resistance in the band between 35,500 and 35,650. A conclusive break above this level can pave the way for the resumed up-move to 36,000 and then to 36,500 over the short term. A further breakthrough of 36,500 will take the index higher to 37,000 and then to 38,000 over the medium term. But failure to move beyond 37,000 can keep the index in a consolidation phase, and caught in the wide band between 36,000 and 37,000.

 

On the downside, investors need to watch for the key medium-term support level of 34,000. A break of this support will alter the on-going short-term uptrend and pull the index down to the next support of 33,000 and then to 32,000. A strong plunge below 32,000 can aggravate selling pressure and pull the index lower to 31,000 and even to 30,000 over the medium-term horizon. Immediate supports are placed at 35,250 and 34,700 levels. Key funds to note under the benchmark of Nifty Bank are Aditya Birla SL Banking ETF, Axis Banking ETF, HDFC Banking ETF, Edelweiss ETF - Nifty Bank, SBI-ETF Nifty Bank and UTI Bank ETF. Amongst these funds, some are yet to complete one year.

Bank Nifty (35,071.9)

Resistances: 36,000 and 36,500

Supports: 35,250 and 34,700

Nifty Midcap 150 (10,329.3)

In trending markets, mid-cap stocks outperform the bellwether indices while protecting downside better than small-caps. The Nifty Midcap 150 consists of the 101st to 250th company from the Nifty 500 basket, which itself is a ranking of the top 500 companies in the market based on full market capitalisation. Featuring many multi-baggers of the recent bull run, this index carries a 0.85 correlation with the Nifty 50. It is less concentrated in the top few sectors than Nifty 50. As of June 30, it had a 22 per cent weight in financial services, 11 per cent in consumer goods, about 10 per cent in industrials and a well-diversified profile across other sectors. This index has returned 77 per cent in the last one year.

The Nifty Midcap 150 index found support at 4,088 in late March 2020 after a steep fall in February and March 2020. The index subsequently changed direction and has been on a long-term uptrend. In November 2020, it broke through a vital barrier at 6,800 and continued to trend upwards. The medium as well as short-term trend are up for the index. In March, it met a key barrier at around 9,200 and experienced a sideways movement in the band between 8,600 and 9,200 until late April. Thereafter it jumped past the upper boundary and continued its primary uptrend. The index faces resistance at around 10,315 and a near-term hurdle at 10,400.

An emphatic close above these levels can take it higher to 10,600. But the prolonged negative divergence in the weekly relative strength index is cause for concern that indicates trend reversal is possible. A conclusive decline below the crucial short-term support level of 10,000, which is also a psychological level, can pull the index lower to 9,800. A decline below this level can drag it lower to 9,600 and then to 9,400 levels. Significant medium-term support at 9,200 is a vital base level to note. An emphatic fall below this level will alter the medium-term uptrend and pull the index down to 8,800 and then to 8,600. Resistance above 10,600 is at 10,800. The passive funds mirroring it are Nippon India ETF Nifty Midcap 150, Motilal Oswal Midcap 100 ETF and ICICI Pru Midcap 150 ETF.

Nifty Midcap 150 (10,329.3)

Resistances: 10,400 and 1,500

Supports: 10,000 and 9,800

Nifty Smallcap 250 (8,732.4)

Small-cap stocks are often the last and most enthusiastic participants in big bull markets. In India, the small-cap space features quality companies too, from sectors that aren’t large enough to find a place in the bellwethers. The Nifty Smallcap 250 is made up of the 251st to 500th company in the Nifty 500, which is based on full market capitalisation. The index has more than doubled in the last one year, but carries a lower correlation to the Nifty 50 (0.79) than the Nifty Midcap 150 index. It also features a very diversified basket of sectors with the top sector (financials) making up just a 14 per cent weight, followed by consumer goods (12.3 per cent) and industrials (12 per cent).

Like other key indices, the Nifty Smallcap 250 index also plummeted sharply in February and March 2020, but found support at around 3,000 in late March 2020 and began to trend upwards. Since then, the index has been in a long-term uptrend. Medium and short-term trends are also up.

But the weekly relative strength index has been displaying negative divergence since March this year and the weekly RSI is showing similar negative divergence since early June. The index is trading at the upper end of the Bollinger Bands in the daily as well as the weekly chart indicating it is trading at the overbought territory. A rally above the immediate resistance level of 8,750 can take it northwards to 9,000 in the short to medium-term horizon. Resistance above 9,000 can be expected at 9,250.

If the index witnesses selling pressure and slumps below the immediate support level of 8,400 that can pull it down to 8,250 and 8,000 in the short term. A strong downward breakthrough of the crucial support level of 8,000 will alter the short-term uptrend and pull the index lower to 7,650. A further decline below this support can see a down-move to 7,250. Supports thereafter are placed at 7,000 and 6,500 levels. Motilal Oswal runs a Nifty Smallcap 250 index fund.

Nifty Smallcap 250 (8,732.4)

Resistances: 9,000 and 9,250

Supports: 8,400 and 8,250

Nifty CPSE (2,047.9)

The ugly ducklings in the bull run until 2020, PSU stocks have suddenly acquired a life of their own in the last year, with the commodity upcycle providing tailwinds. The Nifty CPSE index has been specifically crafted to feature the PSUs disinvested by the Centre and is made up of 12 Central PSUs. This is a concentrated index with 44 per cent exposure to the power sector, 22 per cent to oil and gas, 22 per cent to metals and industrials, and construction making up the rest. It is thus strongly pegged to the performance of the core economy. The index has delivered single-digit returns since inception but has picked up with a 42.5 return in the last one year.

Following a good rally in early 2014, the index met with a key resistance in the band between 2,750 and 2,800 and started to trend downwards. This resistance band limited the upside for the index in the November 2017 and January 2018. Subsequently, the index started to decline and was in a long-term downtrend. However, the index took support at 1,136 in March 2020 and changed direction. It has been trending upwards since and has been in an intermediate-term uptrend.

To alter the long-term downtrend, the index needs to decisively move above the long-term resistance in the band between 2,300 and 2,400 levels. An emphatic break above will strengthen the uptrend and take the index northwards to 2,600 initially and to 2,800 over the medium to long horizon. Immediate resistance for the index is at 2,200, which needs to be surpassed in order to test the barrier in the 2,300-2,400 band.

Since the early April low at 1,676, the index has been in a short-term uptrend. Key immediate supports are placed at 2,000 and then 1,900-1,940 zone. A strong fall below 1,900 will alter the short-term uptrend and pull the index lower to 1,800 levels. A fall below 1,800 can drag it down to 1,700 over the medium term. The Nippon India CPSE ETF was launched in March 2014 and its current asset size is ₹ 14,598 crore.

Nifty CPSE (2,047.9)

Resistances: 2,100 and 2,200

Supports: 2,000 and 1,900

Published on July 10, 2021

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