Midcap, smallcap, microcap stocks: Indices ready to fall 5-10%! 7 data points send red flags

Midcaps and smallcaps stocks are showing signs of exhaustion, which calls for caution in high beta names, Nuvama Institutional Equities said in a technical note. The brokerages expect indices to experience 5-10 per cent decline on violation of key support levels. 

For the Nifty Midcap 100, traders would get a bearish confirmation on a close below 58,000 level. For the Nifty Smallcap 100 index, a close below 19,000 will confirm bearish momentum; Nifty Microcap 250 may need to fall below 24,600 on a closing basis to confirm the bearish trend. 

"We had exited and closed our Mid-Smallcap Thematic basket dated 9th July’24 with +32% returns as the index appears to be overstretched and recommend being risk averse and locking in profits from this sector," it said.

Nuvama said there has been a decline in market breadth, suggesting an early exhaustion signal.

"The Midcap100 remains in a long-term uptrend but is losing steam as momentum indicators are coming out of extreme overbought condition. The ratio chart of the Midcap100 against the Nifty50 has tested its long-term rising channel resistance zone and has retreated from  its recent high, indicating short-term underperformance of the Midcap Space versus large caps," the brokearge said.

Nuvama said it is cautious on midcaps, as the easy bull phase is coming to an end. It sees more stock-specific action going forward from the pack. 

"There are early signs that the broader market is experiencing a lack of momentum and decline in breadth across-the-board after a strong rally. The first bearish red flag for the index will be confirmed on a decisive break below the support levels. Alternatively, if the index fails to break through support levels and continues to rise, we recommend reducing mid-caps until the  index cools with a healthy price and time correction phase," it said.

7 red flags
>> In the broader NSE500, the percentage of stocks above 50 per cent DMA have experienced a sharp decline in breadth values and are on the verge of breaking down the trend line.

>>Large caps are being preferred over Midcaps as the monthly ratio chart is at the long-term rising channel resistance zone.

>>Midcaps are likely to pause and correct as extreme indicators see a cooling off from overbought conditions.

>> In the Microcap 250, there is a formation of a Rising Wedge pattern. The confirmation of the downtrend is likely below 24,600 on a closing basis.

>> In the case of SmallCap 100, percentage of stocks above 50% DMA have experienced a sharp decline in breadth reading. A decisive close below the 19,000 can result in a sharp decline.

>> Caution advised on smallcap trading as the price is forming a bearish reversal formation accompanied by a negative divergence of the Extreme Reading Indicator. 

>> The Midcap 100 has make or break support at 58,000 levels for the bull market