Markets are at a crucial inflection point and Sharma is hoping for a breakout or a breakdown from the painful consolidation seen earlier. Momentum traders have felt that consolidation has taken them out on both sides, he said.
“Now that we have a breakdown, it is good news in terms of momentum. Below 17,750 mark, this is a breakdown and Nifty is headed towards 17,200 levels on the downside,” Sharma said.
According to him, the Nifty has violated the 200-day exponential moving average for the second time for the day. “FIIs have sold heavily in index futures. Bank Nifty has borne the brunt of selling pressure as the put call ratio was 0.4 times on Friday, indicating that the Bank Nifty is in a pretty oversold territory.”
Technical bounce in Bank Nifty is a high possibility due to the brutal hammering it has witnessed and it is important for Bank Nifty to close above 41,000 levels, he said.
Short covering in Bank Nifty should continue in order to see a bounceback, according to him. Overall sentiment needs to improve, he said.
According to him, the Feb. 2 expiry will be crucial to watch out for as significant build-up is happening at 40,000 strike price.
On the put writing side, 39,500 and 39,000 puts are witnessing a high amount of writing, he said. Technical set-up suggests a short bounceback and then a reattempt to test the floor of 39,000 levels on the downside before we see capitulation in the banking index.
Sharma expects high amount of volatility on both sides due to key events like the Union Budget, closing of Adani Enterprises Ltd’s follow-on public offer on Tuesday and the U.S. Fed meet.
He advises traders to stay light in this phase and advises investors to start “nibbling” from a three–six months perspective.
Markets are in a situation where sentiment will overplay any sorts of levels, he said.
Retail investors are stuck with the highest positions since Oct. 25 in Index futures, which stands at approximately 96,513 contracts as on Friday, Sharma said. According to him, retail investors “have got it wrong and FIIs have got it right this time”.
The undertone needs to improve in terms of fear factor, which is India VIX. The correction in Adani Group stocks should stop and the overall focus will shift to the budget and the Federal Open Market Committee, he said.
Sharma does not expect SBI to test levels of 500 on the downside; if it goes down, he advises investors to “nibble in”.
He is positive on HDFC Bank Ltd. and advises investors to accumulate at 1,600 levels as the risk reward is favourable for a target price of Rs 1,800–2,000 in the coming months for a stop loss at Rs 1,535.
There is no fear of Adani Enterprises Ltd. or Adani Ports and SEZ Ltd. coming into the F&O ban, he said.
Adani Enterprises has not sustained for most part of the day below Friday’s low. As long as it does not close below Rs 2,700, there is a strong case of a bounceback as the stock is heavily sold, he said.
According to him, the worst is behind in the short term for Adani Enterprises Ltd. Adani Ports and SEZ Ltd. stock has shown a 19% short build-up, and technical-level support is still far and way deeper, he said.
“If the group stabilises, we could see a bout of short covering as there are significant shorts at the moment,” he said.