Nifty outlook ahead of weekly F&O expiry; how to approach Nifty Bank, midcap, smallcaps stocks

Domestic stock indices saw a sharp fall carnage in Wednesday's session, which erased Rs 13.5 lakh crore from the stock market capitalisation. The BSE Sensex tumbled around 1,500 points from day's high while NSE's Nifty fell below 22,000.  The selling pressure was more intense in the broader market where the BSE midcap and smallcap indices tumbled 4-5 per cent.

On Thursday, traders will be looking at the weekly expiry of the F&O contracts and analysts say that the next crucial support for Nifty is placed at 21,500, which is roughly around 500 points below its previous close of 21,997.70. They said caution is warranted and suggested traders to avoid any attempt to catch up the falling knives.

India & US inflation data came slightly below expectations, thus dampening the sentiment. The market failed to maintain momentum amid intense selling seen in mid and small cap stocks, said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services.

"The ongoing scrutiny from Sebi, pending outcome of MF stress test, and expensive valuation post smart rally seen in last few months led to profit booking. We expect the sluggishness in the market to continue in the near term. Key event to watch out for is India's WPI inflation which will be released tomorrow," he said.

A total of 3,978 shares were traded on BSE on Wednesday, out of which 3,569, or 89.72 per cent, settled lower. Only 350 stocks, or 8.8 per cent, ended the session with gains while 76 shares remained unchanged. A total of 1,086 stocks hit their respective lower circuits in the trading session on Wednesday.

Rajesh Bhosale, Technical Analyst at Angel One said that broader markets faced significant downward pressure while benchmarks maintained higher levels. However, the Nifty yielded to this pressure, breaking below crucial levels and signaling potential further declines in the near term. This was a 'rising channel' breakdown in the mid-cap index and advising caution.

Near-term resistance is anticipated around the 22,200-22,250 range, while the immediate support lies near the 50-EMA, situated between 21,850-21,800, followed by a swing low at 21,500, Bhosale said. "While sharp market declines often disregard key supports, the weekly expiry may influence these levels. Given the expected heightened volatility, traders are advised to avoid undue risk," he added.

Midcap, Smallcap indices
The broader markets were heavily punished on Wednesday, extending their fall, followed by the comments of Sebi Chief Madhabi Puri Buch where she flagged concerns over the irrational exuberance in the broader markets. The BSE midcap index has fallen about 7 per cent, while the smallcap index has tanked more than 13 per cent from their respective 52-week highs.

This drop is followed by concerns raised by the market regulator regarding the overvaluation of mid and smallcap stocks, leading to froth in these segments. The regulator expressed apprehensions about potential frothiness in these segments, highlighting exceptional performance and elevated valuations, said Arvinder Singh Nanda, Senior vice president at Master Capital Services.

"The remarks have sparked speculation about potential restrictions on fund allocation, causing disruptions in market sentiment. Consequently, certain mutual fund AMCs have initiated measures to restrict fund allocation or lump sum investments in midcap and small-cap segments in response to these developments," he said.

Midcap index broke the Triangle pattern on the downside. The crucial support level for the Nifty Midcap Index is placed at 45,150-45,000, said Jatin Gedia, Technical Research Analyst at Sharekhan.

"The Small cap Index has reached the psychological level and 20-week support zone of 15,050 – 15,000. The Next support zone now stands at 13,821 - 13,766 which coincides with the 61.82 per cent Fibonacci retracement level of the rise from 12,048 – 16,692 and the 40-week moving average," he said.

Nifty Bank
Selling was more severe in the PSU banking space, while the private lenders were down but not the index heavyweights. Smaller private lenders like Bandhan Bank and RBL Bank tumbled 6 per cent and 9 per cent. In the PSU Bank index, which tanked over 4 per cent, Central Bank of India, Bank of India, Punjab & Sind Bank dropped 9 per cent each, while Indian Overseas Bank & Maharashtra Bank ended 8 per cent down each.

The bears maintained full control as the index faced rejection at the 47500 mark, establishing it as a strong resistance zone. The index continues in a 'sell on rise' mode until this resistance is overcome on a closing basis, said Kunal Shah, Senior Technical & Derivative Analyst at LKP Securities. "Breaching its 20-DMA suggests a follow-up selling pressure that could drive the index lower."

Nifty Bank held on to the 20-day average (46,962) and managed to close above that, said Gedia from Sharekhan. "With participation coming in from key heavyweights like ICICI Bank, HDFC Bank and Kotak bank, we expect it to hold on to the support zone 46900 – 46700 and recover," he adds.

The word of caution
The sell-off is a double whammy for participants as Nifty has slipped below its immediate support of short-term moving average i.e. 20 DEMA and also breached the trendline support while midcap and smallcap space are already under tremendous pressure, said Ajit Mishra, SVP - Technical Research at Religare Broking.

"We suggest maintaining negative bias in the index now and utilizing rebound to create short positions. At the same time, traders shouldn’t add to their loss-making positions and prefer index majors over others," he said.