Has the market texture changed from #39;buy on dips#39; to #39;sell on rallies#39;? Maybe not, say experts

Has the market texture changed from #39;buy on dips#39; to #39;sell on rallies#39;? Maybe not, say experts
July 22
11:02 2021

Indian markets pared gains after hitting a record on July 16, which has fuelled worries among market participants about a possible market top. The Nifty50 fell by about 2 per cent, after hitting a record intra-day high of 15,962 on July 16.

Yes, the fall is steep, and Nifty50, as well as Sensex, might have slipped below the crucial support levels, but technical experts feel it is a regular bull market correction and investors/traders should not get worried. The trend is still on the upside, they say.

The Nifty50 trades well above the crucial long-term moving averages such as 50,100 and 200-Days Moving Average (DMA). However, the index has slipped below the short-term moving averages such as 5,10 & 20-DMA on daily charts.

A close below the short-term moving averages suggest a cautious stance. Much of the correction is due to external factors, and the Nifty should bounce back from the crucial support levels near 15,250-15,450.

Selling broad-based

“In line with the rout in global markets, the Indian stock markets corrected sharply over the last two sessions, with the Nifty declining close to 400 points since July 16. The selling has been broad-based, with the mid and smallcaps also retreating from their record highs,” Gopal Kavalireddi, Head of Research, FYERS, said.

“It would be too early to say that the tide has turned from ‘buy on dip’ to ‘sell on rallies’, with no evidence to suggest it for now. In fact, in this bull market that has been in place since March 2020, there has been four intermediate corrections, each lasting between 7-11 per cent,” he said.

Kavalireddi further added that we are just around 2 per cent down from the peak. Hence, even if there is a 4-5 per cent correction from here, it would very well be within the confines of this bull market and would present a buying opportunity for the medium term. On an immediate basis, the previous record high of 15,431 on Nifty50 is the key support to watch out for.

Record high despite FII selling

The Indian market has been rising steadily in July to fresh record highs but foreign institutional investors (FIIs) have been net sellers for about Rs 12,000 crore in the cash segment.

Despite the sell-off, the Nifty50 hit a record high in July and has now turned flat in the month. However, the short-term trend is still intact, and in case we see a bounceback, the momentum can take the index towards 15,900.

“The short-term trend is still intact, since the Nifty is trading well above the 15,450-mark, which is the previous swing low. However, at the higher levels, there are multiple tops, too, near the 15,900-mark,” Mehul Kothari, AVP, Technical Research at AnandRathi, said.

“Thus, for the time being, the Nifty is in a range and one should adopt the mean reversion technique, i.e., buy near support and sell near resistance,” he said.

This is not the first time the Nifty50 is witnessing selling pressure above 15,900. Anecdotal data suggests that this is the eighth time since June when the index failed to hold on to this level.

Global investors have also turned slightly cautious amidst the rise in the Delta variant of Coronavirus. This could possibly delay economic recovery, and a possible third wave.

Worry not, all is well on EPS front

“Equity markets, by their very nature, are volatile. And if history is our mirror, time and again, the markets have managed to recover from such corrections. Currently, the mood has turned sparsely negative due to the uncertainty around the third wave,” Nirali Shah, Head of Equity Research, Samco Securities, said.

“While markets are affected by sentiments and expectations in the short term, long-term growth is driven by EPS which doesn’t seem to have developed cracks yet. The recent dip in the market should be regarded as a much-needed healthy correction,” she added.

Ajit Mishra, VP, Research, Religare Broking, echoes a similar thought. “The fast spread of the Delta plus variant has dented sentiments globally. Besides, the beginning of the earnings season is not so encouraging,” he said.

“Though we can’t ignore the possibility of a further slide, we are still positive structurally in the medium term, given the strong support from central banks and the governments,” added Mishra.

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