Stay light as bears may be preparing for short-term vengeance: Mehul Kothari of AnandRathi

Market Outlook

A breach of 14,800 would lead to a sharper fall towards 14,600 due to unwinding by the Put writers. An attempt to clear 15,200 could be used to exit long trades, says Mehul Kothari of AnandRathi.

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For very short-term traders with a time frame of few weeks, the texture has turned a bit bearish. And, it is not the bulls who are losing their grip but it’s the bears who might be preparing for a short-term vengeance, Mehul Kothari, AVP – Technical Research at AnandRathi said in an interview with Moneycontrol’s Kshitij Anand.

Q) A week of consolidations where Nifty50 broke below crucial support levels. What led to the price action on D-Street?

A) In our previous interaction, we stated that the zone of 15,400 – 15,600 might attract some short formations and distribution in the markets.

Well in line with that view, the NIFTY made a high of 15431.75 and tumbled down to 14,900 levels. We reiterate that the sole technical reason for this kind of price action is an extended rally of around 1800 points in NIFTY with a faster pace.

There has to be a healthy pullback for any bull run to sustain for a longer time. So far the major supports are placed at 14,800 and 14,600 on a closing basis for the coming week.

Q) The coming week will also be impacted by monthly expiry. What is your outlook on markets and important levels which one should track? What is the range you foresee for expiry?

A) For the coming week, obviously the volatility would spike due to expiry price action. However; we continue to have a vigilant stance on the markets for the short term due to multiple reasons.

Firstly, the index has turned from 161.8 percent Fibonacci retracement of the entire crack from 12,430 to 7,511. Thus, till the time 15,500 – 15,600 is not taken out decisively, we expect further profit booking in the markets.

Secondly, the seasonality chart of NIFTY shows that the 20-year, 10-year and five-year average return for the index in the month of February and March has not been that encouraging.

This month of February has been exceptional and we expect some cool off from here on. From the expiry perspective, till now the range seems to be 14,800 – 15,200 due to heavy OI concentration in both strikes.

A breach of 14,800 would lead to a sharper fall towards 14,600 due to unwinding by the Put writers. An attempt to clear 15,200 could be used to exit long trades.

Q) The broader markets outperformed benchmark indices in the week gone by. What led to the price action?

A) In our previous interview, we mentioned that there is a phenomenon in which after a significant upside – especially when the heavyweights go through some profit booking then at that time the buying interest is diverted towards mid and small caps.

This is exactly what has happened in the week that went by. Till the time Nifty is above 14,800 the broad market outperformance is likely to continue.

Q) What is driving PSU banking stocks?

A) As per our fundamental research team we have seen a sharp rally in almost all the PSU Banks due to various reasons like the announcement of recapitalisation package in PSU banks to the tune of 20,000 crore; emphasis of the Government on privatisation of PSU banks.

Also, the macro factors which are seen improving as the economy re-opens also added to the strength in the rally.

All the above factors are both financially and sentimentally positive for the sector and hence we have seen markets showing confidence in the long-neglected sector. However, on the technical front, we expect some breather from here on in the entire pack.

Q) Do you think bulls are losing their grip on D-Street? Has the market texture turned towards sell on rallies from buy on dips?

A) The answer to this depends on the time frame of a trader. For a participant with a perspective of six months to one year or more; the markets continue to be Buy on Dips.

However, for very short-term traders with a time frame of a few weeks; the texture has turned a bit bearish due to the reasons mentioned above. It’s not the bulls who are losing their grip but it is the bears who might be preparing for a short-term vengeance.

Thus, one should wait for a decent correction for fresh longs where the risk-reward ratio would be appropriate. This is the reason why we have covered trading ideas in such kinds of stocks where the fall could be minimal.

Q) Please suggest three-five trading ideas for the next three-four weeks?

A) Here is a list of top trading ideas for the short term:

HUL: Buy | LTP: Rs 2,181 | Stop Loss: Rs 2,080 | Target: Rs 2,380 | Upside: 9 percent

Recently, the stock corrected from the peak of 2,450 and is now trading below the 2,200 mark. At this point in time, the stock is hovering at the placement of 200-Day EMA and 200-D SMA which might act as a buying zone.

Further, the support coincides with the placement of a long-term rising trend line.

In addition, the stock has the support of Ichimoku Flatline at current levels. The convergence of all the supports at similar levels makes the risk-reward lucrative to go long.

Thus, traders are advised to buy the stock in the range of 2180 – 2170 with a stop loss of 2080 for the upside potential target of 2380 in the next three-five weeks

Petronet LNG: Buy | LTP: Rs 251 | Stop Loss: Rs 230 | Target: Rs 285 | Upside: 13 percent

In the past few weeks, Petronet has corrected from the peak of 275 and sneaked below 240 mark. Similar to HUL, the stock Petronet found support at the placement of its 200-D EMA and 200-D SMA near 235 mark.

This has acted as a demand zone for the stock. During December; the stock confirmed a breakout above 260 mark from the ‘Cup and Handle’ pattern on the weekly scale and the pattern has a theoretical target of around 350.

Currently, the stock has retested that breakout zone and we expect the momentum to pick up from here on. Traders are advised to buy the stock in the range of 252-248 with a stop loss of 230 for the upside potential target of 285 in the next three–five weeks.

SBI: Sell | LTP: Rs 400 | Stop Loss: Rs 430 | Target: Rs 370 | Downside: 7.5 percent

In the month of Feb 2021 itself, SBI has rallied by more than 40% which has brought it into an overbought zone on a daily scale. The weekly RSI is now above 80 levels and we have observed that historically the stock undergoes some profit booking once the RSI reaches above 80.

Further on-line chart, the stock seems to be trading in a rising channel since the year 2011 and currently it is hovering at the upper end of that channel.

The mentioned technical evidence indicates that the stock is poised for a considerable correction after the relentless run-up.

Thus we advise traders to sell the stock only on the bounce in the range of 405–415 with a stop loss of 430 for the downside target of 370 in the next three–five weeks.

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