Small caps to outperform indices

Market has given up the initial gains last week. The benchmark index, Nifty closed at 14,677.8 with 145.35 points or 0.98 per cent loss. BSE Sensex lost one per cent during last week. The broader indices Nifty Midcap-100 declined by 0.7 per cent, and the Smallcap-100 index up by 0.3 per cent.

Nifty-500 declined by 0.72 per cent. PSU bank index advanced by 3.7 per cent, and media up by 2.4 per cent on the sectoral front. Nifty metal declined by 4.6 per cent. FIIs sold Rs 8713.25 crores and DIIs bought just Rs 891.20 crores worth of equities during the current month. India VIX declined by 2.67 per cent and settled at 20.27. Overall market breadth is not so great.

The Nifty formed the dark cloud cover on a weekly chart. An optimistic opening with a breakout failed to maintain the momentum and missed the follow through days. As on Tuesday, the Nifty opened with a sizeable gap down, Monday's candle has turned as an evening star. It added distribution days and drifted below the 50DMA once again on Friday. The 100DMA support is just 100 points away. Historically 100DMA worked as support.

As the distribution day count is at three, any increase will change the market status to a confirmed downtrend. In fact, the weekly resistance line still an arduous task for the market to cross. 20 weekly average worked support but, let us wait and see this level 14,620 level will hold for next week. In any case, the Nifty closes below this level, which will be another sign of a bearish zone.

As mentioned earlier, the weekly RSI at 58.53 and a move below 55 zone, will create another swing low. With all probability, if the RSI falls below by the next weekly close, the Nifty will resume or continue the minor trend down, will the test the recent low of 14,191 quickly. On a daily chart, the price and RSI divergence are clearly visible. RSI faced resistance exactly at the channel resistance line. It must take support at 45-46 level, which is currently 49.74.

The MACD histogram shows that the initial bullish momentum is waning. The positive directional indicator +DMI and the trend strength indicator ADX are falling. Even on the weekly chart, the same trend is visible. Overall, all technical parameters and the pattern analysis shows the inherent weakness in the market.

For the next week, things may not change towards the positiveness. The Nifty may face resistance 14,880-15,000 zone, and similarly may decline towards, 14,469-14,264-14,191 zone of support. The defensive sectors like FMCG turned positive last week, and the pharma, IT sector, will play an important role in protecting the market from the big crashes. These three sectors are in the leading quadrant and moving towards the leading quadrant. As suspected last week, the metal sectors seem to be in overbought and witnessing the profit booking. The energy sector losing momentum and failed to move into the leading quadrant. All the other sectors are avoidable for now as all of them are in a lagging quadrant.

The Covid curve started trending down and may ease lockdowns from the next two weeks in some states. The vaccine drive also may gain momentum as the new vaccine arrivals and the supply improvements.

Importantly, about eight Nifty companies to announce financial results next week, and over 170 companies will release the Q4 results. This may cause a stock-specific activity more. As the benchmark indices trading in sideways, and the out-performance of small caps will continue. Focus on smallcap, Pharma, IT and FMCG stocks, which are in a suitable set up to trade.

(The author is a financial

journalist and technical analyst.

He can be reached at tbchary@gmail.com)