Super breakout in Nifty…What’s next?

Let’s answer this question in three parts.

First, let’s look at the fund flows. Currently, India is a hot spot for investment in emerging markets. Foreign institutional investors (FIIs) have demonstrated their confidence in our equity markets by investing Rs 121,728 crores in FY24 so far.

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This is a significant turnaround from the previous two financial years when FIIs were net sellers. The comeback of FIIs is a positive sign and suggests that the optimism in Indian indices is likely to continue.
Second, let’s look at the short-term price action. When we take a closer look, the Nifty generally sustains momentum after an all-time high breakout. To give you a gist, there were 11 instances since the calendar year 2003 where the index has given an all-time high breakout.

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After such a breakout, Nifty has delivered positive returns 72% of the time with an average gain of 12% in the next 250 trading days. As the previous all-time high breakout occurrence was on 29-11-2022, the index has only given 6.74% returns till date and the same is yet to reflect fully. Consequently, there is a high likelihood of brighter prospects in the future.
Finally, let’s look at the valuations. The current Price-to-Earnings ratio (P/E) ratio of Nifty at 22.72x is notably lower than it was during the October 2021 peak (P/E at 28.17x). Therefore, the valuation is reasonable now, making it a more alluring investment opportunity.

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Source: Trendlyne

While it may seem that all the stars have aligned to support this optimism and keep the Indian equities buoyant, investors should be mindful of the global markets. As such, investors should ride this bull run with fundamentally sound stocks rather than investing in shares that are rising on hype.

Technical Outlook

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Nifty continued its stellar run after breaking out of its previous all-time high of 18,888 made on 1st December, 2022 to close the week at 19,332, up 143 points.

Despite the strong rally, Nifty showed some signs of weakness as it formed a doji candle on the daily chart, signaling indecision, on the 4th and 5th July and ended the week forming a shooting star candle, which is considered to be a bearish reversal pattern. The Put-Call Ratio (PCR) touched 1.45 on 6th July, the highest level since the start of 2023. Interestingly, the last time when Nifty topped out on 1st December, 2022, PCR was at 1.46.

The shooting star like candle formation is around the 1.272 Fibonacci Extension of 19,456 drawn from the highs of 18,887.60 on 1st December, 2022 to the lows of 16,828 on 20th March, 2023. The maximum call open interest for Nifty is placed at 19,500 and the option activity at 19,500 Strike will set the tone Nifty’s future movement. The downside support for Nifty is placed at 19,200.