Stock market: 5 reasons why ICICI Direct has a constructive bias on Nifty

ICICI Direct has maintained its constructive view on the stock market, even as the fear gauge India VIX has slipped in single digits. The domestic brokerage noted that there have been two instances since 2017, when India VIX has slipped below the 9 level mark, and on both occasion the Nifty formed Cup & Handle formation, witnessing a positive breakout. 

Data showed India VIX hit a low of 8.86 level on December 22. It hit a level of 9.05 today, but was later trading at 9.54.  "In the current scenario too India VIX has fell around 9, with a formation of Cup & Handle pattern in Nifty, mirroring a similar past rhythm," the domestic brokerage said.

Besides, the brokerage said historical data since 1995 suggest that, on 90 per cent of the occasions Nifty has delivered positive returns in last 10 days of the year with a median of 2 per cent. 

ICICI Direct said the rupee-dollar exchange rate has retreated from the upper band of rising wedge. Historically, it said, there have been five instances where a retreat in rupee-dollar from the upper band of this wedge averaging a 4 per cent decline over a two-month period was followed by the Nifty delivering average gains of 10 per cent over the subsequent two months.

ICICI Direct said US equity markets have also rebounded strongly to record highs, led by broad-based participation rather than the Magnificent Seven. The Russell 2000 (Small cap index) has consequently surged and is now trading near its all-time high, underscoring improving market breadth.

The domestic brokerage, meanwhile, also cited a rally in commodities and falling dollar index. Equities too share inverse relation with the Dollar index.  

"The US Dollar Index (DXY) has decisively slipped below 98 after failing to sustain above 100, easing currency-led headwinds. This has fuelled a sharp up-move in base metals, with Copper scaling fresh (all-time highs on MCX), while Aluminum breaks out from a three-year base, signalling the start of a structural uptrend," it said.

Nifty outlook
ICICI Direct said the weekly price action has formed Small Bull candle with breakaway gap, signalling resumption of uptrend post healthy consolidation.

"Notably, after three week’s decline, index has resolved higher with a decisive breakout above its downward sloping channel accompanied by higher-high-low structure, indicating a pause in downside momentum and setting the stage for the next leg of the up-move towards 26,300 in the coming weeks," it said.

Over past two months, Nifty has been defending short-term moving
average of 50 days EMA that coincided with last week’s low of 25,700, highlighting key support threshold, the brokearge said.