Build portfolios with fundamentally strong small, mid-cap stocks

The Indian stock markets ended on a flat note during the last week. The benchmark index gained 130.60 points or 1.15 per cent. Majority of the gains contributed by index heavyweight Reliance industries (RIL). The BSE Sensex also gained by 1.3 per cent. The broader market underperformed as the Nifty Midcap-100 and Smallcap-100 indices fell by 0.9 per cent and 0.5 per cent respectively. On the sectoral front, The Energy and IT indices gained by 3.3 per cent and 3.1 per cent respectively. Pharma and FMCG indices gained by an average of 0.5 per cent. On the flip side, the Metal and Pvt Bank indices declined by 2.7 per cent and 2.4 per cent. The FIIs' selling spree receded during the last week. They sold a net Rs8.36 crore. The advance-decline ratio is little favourable towards declines.

The NSE Nifty formed a Hammer pattern on a weekly chart. Last week's Bearish Engulfing pattern did not get the confirmation as the price closed above the previous week's low. This is another instance of failing technical classic and candlestick pattern failures. After an island reversal on Thursday closed with big gain, but the follow-through day is missing. After a big bullish day, it traded in a range and formed a small body indecisive candle. It failed close above the 50 per cent retracement of the prior downswing. At the same time, on the positive side, the Nifty failed to close below the 50-DMA and form a lower low. With this, the trend remains upwards as a lower low yet to be formed. It closed above the 20DMA and sustained for the second day. The cash volume was below the 50-day average volume. During the last week, two distribution days added and one expired. The Nifty currently has six distribution days. With the current trend is categorised as uptrend under pressure. In any case, the Nifty closes below 50DMA in coming days with 5-6 distribution days, will turn in to a downtrend.

Coming back to the technical structure of the Nifty, it is bullish structure. The bears are failing several times to get confirmations to the bearish patterns. There are concerns in an ongoing uptrend. The volumes are not picking up. The trend strength weakening as the ADX is falling after making a peak on 30 July. The MACD histogram is still below the zero line. Finally, the bar size on bullish days is not giving any confidence in the trend. When there was fall, the bar size larger than the bullish day. A majority of the bullish days are opened with gaps and most of the days traded in first hour's range. Even on Friday, It traded only first 15 minute's range. These concerns may be technically not effective in the recent past. Even the fundamental and geopolitical factors did not impact market structure. The RSI, leading indicator, once again reclaimed to above 55 zone. In any case, it sustains above the 60 zone, will strengthen the bulls further. It has given a buy signal on Wednesday by forming a swing. This leading indicator formed a lower low, but the price did not make any lower low. This structure is generally bullish as per the Andrew Cardwell's RSI Edge rules. As long as the Nifty trades above the 50DMA, there is a higher probability of reaching above the recent swing high of 11,794. With 11,222 as stop-loss be with cautiously optimistic about the trend.

Focus on building portfolios with fundamental strong, low float, lower debt small and mid-cap stocks. It is expected about Rs40,000 crore funds to be shifted to these stocks.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)