The Nifty index experienced a weakening of its near-term technical structure following a decisive drop below the 20-day moving average, according to Rupak De, Senior Technical Analyst at LKP Securities. The shift raises concerns about a potential downside risk, with the index potentially falling to 25,000 unless it can swiftly regain lost ground.
The downturn was particularly pronounced on Friday, with IT stocks leading the decline following negative signals from US markets, specifically a sharp sell-off in the NASDAQ. While the IT index staged a partial recovery during the day, the broader Nifty index closed significantly lower. Adding to the bearish sentiment, the India VIX – a measure of market volatility – surged above its 200-day moving average, indicating increased investor fear.
Technically, the Nifty’s breach of the 20-day moving average, its first in three to four sessions, coincided with a fall below the 38.2% Fibonacci retracement level of the previous rally from 24,571 to 26,341. De anticipates further weakness, with a potential decline towards 25,000 in the short term, should the index fail to reclaim the 25,800 resistance level.
The IT sector, which triggered the initial market weakness, has been exhibiting a volatile and uneven trend. The sector experienced a “false breakout” followed by a sharp correction, falling below a key support level of 35,400, a level previously identified by De as a critical juncture. This decline pushed the index to 31,422. A weekly RSI analysis also revealed a hidden bearish divergence, suggesting weakening momentum within the sector.
Despite the overall negative outlook, certain sectors are showing resilience. The defense sector, while limited in its overall contribution to the index, maintained relative strength throughout the week, holding above its 20-week Simple Moving Average (SMA). De expects this positive momentum to persist in the short term, particularly for stocks currently trading near their immediate support levels.
State Bank of India (SBI) emerged as a top weekly gainer, demonstrating strong momentum following a consolidation breakout. De recommends a cautious approach to SBI, suggesting investors accumulate the stock gradually, utilizing any dips as buying opportunities for a medium-term investment horizon.
De provided specific trading recommendations for the week, including a sell signal for Indian Hotels with an entry point of 700, a stop loss at 717, and a target price of 670, citing a lower high formation on the daily chart and a bearish divergence in the RSI. He also advised selling Persistent at 5,480, with a stop loss of 5,600 and a target of 5,280, based on a breakdown below its 200-day moving average and a weakening hourly chart trend. Conversely, he recommended buying Kirlosker Engineering at 1,379, with a stop loss of 1,325 and a target of 1,500, citing a breakout above a previous swing high and improving momentum indicators.