1. NIFTY50 outlook (February 5 to 9): RBI policy, Q3 earnings, F&O cues and other key factors to watch this week

NIFTY50 outlook (February 5 to 9): RBI policy, Q3 earnings, F&O cues and other key factors to watch this week

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5 min read • Updated: February 4, 2024, 7:15 PM

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Summary

After reaching a new all-time high last week, the NIFTY50 formed a shooting star pattern on the daily chart, suggesting a potential bearish reversal. Crucial resistance for the index lies at 22,124, while the support is at the 20 DMA (21,650) and 50 DMA (21,250). Traders will want to monitor these levels closely for a possible confirmation of the reversal pattern.

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Key things to watch in markets in the week ahead

Indian equities staged a strong rebound and closed the week ending 2nd February in the green. The benchmark NIFTY50 rose 2.3% to 21,853 while the Sensex gained 1.9% to 72,085. This positive sentiment extended to the broader markets with the NIFTY Midcap 100 and NIFTY Smallcap100 posting even stronger gains of 2.7% and 5.6% respectively.

While the interim budget didn't have major announcements, the government's roadmap for fiscal discipline has cheered investors. Experts believe that infrastructure, defence, tourism and railways are among the key sectors that will benefit from the announcements made in the current interim budget.

PSU banks (+11.5%) led the sectoral gains for the week, fuelled by investor optimism over the fiscal prudence announced in the interim budget. Oil & Gas (+9.1%) and Metals (+4.6%) followed closely, while Media (-0.3%) and FMCG (-0.2%) were the laggards.

Index breadth

Our previous blog warned readers of potential volatility due to key events and highlighted a bearish engulfing pattern on the weekly chart of the NIFTY50. Despite encountering resistance from the 15th January high (22,124), the NIFTY50 defied expectations and rallied to a new all-time high this week.

This rebound coincided with a significant improvement in our breadth indicator. On 25 January, only 46% of the NIFTY50 stocks were trading above their 20-day moving average (DMA). By the end of the week, this had risen to 72%, highlighting the broad participation in the market rally.

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FIIs positioning in the index

Despite maintaining an overall bearish stance in index futures, Foreign Institutional Investors (FIIs) showed a notable shift in their positions. While their short positions, betting on declining of prices, remained significant at 67%, they were actually reduced from a much higher 78% from the week before. Interestingly, their long positions, reflecting bets on rising prices, also saw a moderate increase from 22% to 33%.

As we pointed out last week, even a slight moderation in extreme FII bearishness on the back of interim budget optimism could trigger a short-covering rally. Given the current reduction in short positions, traders should closely monitor any further changes in this figure to gauge FII sentiment and the potential impact on the indices.

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In line with the bearish bets, FIIs have been dumping shares in the cash market. In the month of January, FIIs sold shares worth ₹35,977 crore. However, the Domestic Institutional Investors (DIIs) absorbed the maximum sell-off and bought shares worth ₹26,743 crore.

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Click here to track inflows and outflows of FIIs in the cash market: Login https://pro.upstox.com/ ➡️F&O➡️FII-DII activity➡️Cash market

F&O - NIFTY50 outlook

For the February 8 expiry, the maximum call writing was seen at the 22,200 and 22,000 strikes. On the other hand, the bulls have established a base with maximum put writing at the 21,600 and 21,500 strikes. According to options data, the NIFTY50 is expected to trade between 22,400 and 21,300.

Experts caution that the NIFTY50 is facing strong resistance at its previous all-time high of 22,124. Adding to the concern, a shooting star candle was formed on the daily chart, indicating a potential bearish reversal. However, traders often remain cautious after such signals and wait for the next candle's close for confirmation.

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📈📉Earnings blitz: The fag-end of the earnings season is in full swing with several key companies reporting their Q3 results. Investors will be closely watching the results of Bharti Airtel, Ashok Leyland, Britannia, Chambal Fertilisers, Nestle India, Power Grid, Lupin, Apollo Hospitals, Page Industries, Biocon, Hero Motocorp and Aurobindo Pharma.

🏦Focus on central bank: The three-day meeting of the Reserve Bank of India's (RBI) rate-setting panel will take place from the 6th to 8th of February. The RBI Governor will address the press conference on the 8th, which is also the weekly expiry date for NIFTY50 options contracts. Meanwhile, the RBI kept the repo rate unchanged at 6.5% for the fifth consecutive meeting in December.

💻Spotlight: Major U.S. tech companies reported their earnings last week. The powerhouses such as Apple, Alphabet, Amazon, Meta Platforms and Microsoft all beat earnings expectations. However, there were concerns about Apple's growth and Alphabet's declining ad revenue.

Meanwhile, the U.S. economy is humming along with the creation of 3,53,000 non-farm payroll jobs in January, more than expected. Investors will now turn their attention to next week, when the companies like McDonald's, Ford Motor, Spotify, Paypal, Uber, Walt Disney and PepsiCo will report earnings.

📊Stocks in focus: As per the open interest and futures price, the stocks showing long build-up are Bharat Petroleum Corporation, Abbott India, GMR Airports Infrastructure, Hindustan Petroleum Corporation and Jindal Steel & Power. Similarly, to track the OI losers login https://pro.upstox.com/ ➡️F&O➡️Futures smartlist➡️OI Gainers/OI Losers/Most active.

📓✏️Takeaway: As the NIFTY50 hit a new all-time high for the week, a shooting star pattern formed on the daily chart, indicating a potential reversal. This bearish reversal signal needs to be confirmed, but the NIFTY50’s sharp fall, giving up most of the day's gains and closing near the low, paints a cautionary picture.

For the upcoming week, the resistance remains near the previous all-time high. Traders should keep a close eye on the 20-day moving average (DMA), which currently stands at 21,650. A break below this level could trigger a further decline towards the next key support level at the 50 DMA at 21,250.

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