F&O Talk: Smallcap index better placed than Nifty, says Sudeep Shah; picks 9 stocks for next week

The Indian stock market extended gains on Friday, with Sensex and Nifty rising more than 0.3% each due to easing Middle East conflict, lower expectations of Fed rate hikes, and other key factors.Sensex gained around 262 points to close at 77,764, while Nifty 50 rose more than 95 points to end the session above 24,270 during Friday's trading session.

The sharp gains added nearly Rs 44,155 crore to the total market capitalisation of all companies listed on BSE, pulling it up to Rs 480 lakh crore.

Analyst Sudeep Shah, Vice President and Head of Technical & Derivatives Research at SBI Securities, interacted with ETMarkets regarding the outlook for the Nifty and Bank Nifty, as well as an index strategy for the upcoming week.

The following are the edited excerpts from his chat:Nifty has closed the week over a percent higher.

What are crucial levels to track next week?The benchmark index Nifty remained confined to a narrow range of nearly 500 points over the past 13 trading sessions.

On Friday, the index finally broke out of this consolidation, but the breakout lacked follow-through as profit booking emerged at higher levels, restricting further gains.

Consequently, the index settled the week at 24,270, registering a gain of 0.89%.

On the weekly chart, Nifty formed a bullish candle with shadows on both sides, reflecting continued indecisiveness among market participants.

Notably, this marks the third consecutive week of an indecisive candlestick formation, highlighting the ongoing tug-of-war between bulls and bears.

But beneath this seemingly directionless move, a completely different story is unfolding in the broader market.While the frontline indices continue to move cautiously, the Nifty Smallcap 100 is painting a completely different picture.

The index has consistently outperformed the benchmark over the past few weeks and is now just a stone's throw away from its all-time high, whereas Nifty continues to trade nearly 8% below its record peak.

Moreover, the relative strength chart of the Nifty Smallcap 100 against Nifty has climbed to an 81-week high, underscoring the sustained leadership of the broader market.

Based on the prevailing chart structure, the bullish momentum in the small-cap segment is likely to remain intact over the next few trading sessions.

The bigger question now is whether Nifty is preparing to follow this leadership or continue lagging behind.Turning back to Nifty, the index continues to trade comfortably above its 20, 50, and 100-day EMAs, indicating that the broader trend remains positive.

In addition, the daily RSI has moved above the 60 mark, signaling strengthening bullish momentum.

Going forward, the 200-day EMA zone of 24,400–24,450 is expected to act as a crucial resistance area.

A decisive move above 24,450 could trigger a fresh leg of the rally towards 24,700, followed by 24,900 in the short term.

On the downside, the 100-day EMA zone of 24,150–24,100 is likely to provide immediate support.

A breach below 24,100 could expose the index to the next important support zone near the confluence of the 20 and 50-day EMAs, currently placed around 23,920–23,880.

With the market approaching a crucial technical juncture, the next few sessions could decide whether this breakout evolves into a sustained rally or another false start.In June, Sensex largely remained range-bound, oscillating within a 4500-point band.

What's your outlook for July?The benchmark index Sensex registered a breakout from a 13-day consolidation phase on Friday.

However, the index could not sustain at higher levels and witnessed profit booking, eventually closing the week with a gain of 0.87%.

On the weekly chart, Sensex formed a bullish candle with shadows on both sides, marking the third consecutive week of such a formation, indicating indecisiveness despite a positive bias.Technically, the index continues to trade above its 20, 50, and 100-day EMAs, with the 20 and 50-day EMAs gradually trending higher, reflecting a constructive undertone.

The daily RSI has moved above the 60 mark and remains on an upward trajectory, suggesting strengthening momentum.

However, the daily ADX stands at 13.39 and continues to decline, indicating that the current trend lacks strong directional conviction.Going forward, the 78,300-78,500 zone is likely to act as a key resistance area as prior swing high is placed in that region.

A decisive and sustained move above 78,500 could trigger a fresh leg of rally towards 79,200, followed by the psychological 80000 mark in the near term.On the downside, the 20 and 50-day EMA zone of 76,500-76,400 is expected to provide strong support.

As long as the index holds above this zone, the broader short-term outlook is likely to remain positive.After June's expiry and the start of a new series, what do F&O positioning and open interest trends suggest?After the June expiry and the start of the new series, F&O positioning points to a constructive undertone for Nifty.

Between June 15 and July 2, the index consolidated in the 23,785–24,262 range while open interest declined 7.11% despite a 1.06% rise in price, indicating gradual short covering rather than fresh short buildup.

The put-call ratio remained stable between 0.81 and 0.85, suggesting balanced positioning with put writers absorbing selling pressure.

The FII long-short ratio also improved from 7.58% on 8th June to 17.02% on 29th June during June before easing to 10.36% on expiry day, reinforcing the view that bearish bets were being unwound.

Following the July 3 breakout, Nifty has reclaimed the 100-day EMA, RSI has moved above 60, and DI+ has crossed above DI-, signalling strengthening bullish momentum.

Any further short covering could provide an additional boost to the ongoing up move.How are FIIs and DIIs positioned in index futures?FIIs continue to hold a net short bias in index futures, but positioning suggests gradual short covering rather than fresh bearish additions.

The FII long-short ratio improved from 7.58% on June 8 to 17.02% on June 29 before easing to 10.36% on the June expiry.

Since the start of the July series, it has slipped marginally to 9.59% as of July 3.

However, net short positions in index futures have reduced from 2.56 lakh contracts on June 30 to 2.50 lakh contracts on July 3, indicating that shorts are still being covered, albeit at a slower pace.Meanwhile, the DII long-short ratio has eased only marginally from 90.22% on June 15 to 86.79% on July 3, reflecting continued supportive positioning.

This steady stance from DIIs has helped absorb FII selling pressure and provided stability to the market.

With Nifty breaking out of its consolidation range, any acceleration in FII short covering could act as a catalyst for further upside.How are Nifty IT and Bank placed in the coming week?Nifty IT - The broader technical structure of the Nifty IT Index remains weak.

The index continues to trade below its key moving averages on both the daily and weekly timeframes, indicating that the primary trend remains under pressure.From a relative strength perspective, the index continues to reside in the lagging quadrant of the Relative Rotation Graph (RRG), reflecting weak relative performance and subdued momentum compared to the broader market.

Reinforcing the cautious outlook, the MACD remains below both the zero line and the signal line, indicating the absence of meaningful bullish momentum.

Rising ADX indicates bearish trend strength.

Historically, the 26,200–26,100 zone has acted as a strong demand area.

Between June 2022 and April 2023, the index witnessed multiple rebounds from this region, making it a crucial long-term support zone.

While intermittent pullbacks and short-covering rallies cannot be ruled out, a meaningful trend reversal is unlikely unless the index decisively reclaims the 28,300–28,400 zone.

Until then, the broader technical bias is expected to remain cautious, with any relief rallies likely to encounter selling pressure at higher levels.Nifty Bank - Last week, the banking benchmark Bank Nifty traded within a narrow range of 939 points, marking its narrowest weekly trading range since the last week of December.

The index underperformed the broader benchmark indices and formed a small-bodied candlestick with shadows on both sides.

Notably, this was the third consecutive week of a similar candlestick formation, highlighting a phase of indecision among market participants.Despite the subdued price action, the index continues to trade comfortably above its short and long-term moving averages.

These moving averages remain in an upward trajectory, indicating that the broader trend continues to be positive.

The daily RSI is positioned in bullish territory; however, it has been oscillating in the 60-63 range over the last four trading sessions, suggesting a lack of fresh momentum at higher levels.Going forward, the 58,600-58,700 zone is likely to act as a key resistance area for the index.

A decisive and sustained breakout above 58,700 could pave the way for a sharp upward move towards 59500, followed by the 60300 level in the short term.On the downside, the 20-day EMA zone of 57,100-57,000 is expected to act as a strong support base.

As long as the index sustains above this crucial support zone, the overall short-term trend is likely to remain constructive with a positive bias.Can you name few stocks that are looking good on the charts for next week?Technically, Aurobindo Pharma, Lodha, LT Foods, Zydus Life, AB Capital, DLF, Oberoi Realty, Titan, and Divis lab are looking good for next week.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own.

These do not represent the views of The Economic Times) ...