Sensex, Nifty in a downward spiral. Are the markets in an oversold zone?

The S&P BSE Sensex has lost nearly 3 per cent thus far in October, and down almost 6 per cent from its 52-week high level of 67927.23 hit on September 15, 2023.

Rising bond yields, driven by hawkish central bank policies and flaring crude oil prices, have cast a shadow over the markets in recent days. The S&P BSE Sensex has shed nearly 3 per cent in October so far. From its 52-week high of 67,927.23 reached on September 15, 2023, the index has dropped by close to 6 per cent.

The decline from their recent peak levels, as indicated by technical charts, has not yet pushed the front line indices into oversold territory according to their relative strength index (RSI), which still hovers around the 40 mark for both the Sensex and the National Stock Exchange Nifty50.

The RSI is a technical indicator plotted on a scale of 0-100, where stocks and indices crossing 70 are considered overbought. Conversely, a stock is regarded as oversold when it falls below the 30 mark.

Market participants closely monitor the RSI to gauge the strength of stocks based on 70 and 30 values. This aids in identifying stocks and indices that are subject to increased buying or selling pressure.

Among the Nifty50 stocks, 10 scrips, including Adani Enterprises, Divi’s Laboratories, Infosys, Nestlé India, Reliance Industries, State Bank of India, and Wipro, have seen their RSI dip below the 30 mark, indicating that they are trading in oversold territory.

On the other hand, only 25 stocks in the Nifty Midcap 150 Index are trading in the oversold zone. The list includes Bandhan Bank, Bank of India, Biocon, Gujarat Gas, L&T Technology Services, Page Industries, PolicyBazaar, and YES Bank.

In the Nifty Smallcap 250 Index, a total of 44 counters are in the oversold zone. Some of the prominent ones include Bharat Earth Movers, Crompton Greaves Consumer Electricals, Data Patterns (India), Engineers India (EIL), Finolex Cables, HFCL, KRBL, and Raymond.

“The Nifty50 needs to break beyond the 19,425 level to signal the retreat of bears. We hope that the 19,230 level holds. The next support is at 19,050 levels for the index. A breach below this could see the Nifty50 sliding to 18,600 levels, which is its 200-day moving average,” said Anand James, chief market strategist at Geojit Financial Services.

Midcap mayhem

Meanwhile, the drop in midcaps and smallcaps has been more pronounced in the past few days, with both of these indices declining by around 5 per cent and 4 per cent, respectively, in October.

From a short-term perspective, Chokkalingam G, managing director-research at Equinomics Research, remains cautious about midcap and smallcap segments due to relative valuations.

“If the Israel war leads to tensions across West Asia, then oil prices may further spike, exacerbating pressures on the Indian economy and markets in the short term. Thus, we suggest a cautious approach in terms of maintaining limited exposure to these two market segments,” he said.

Traders, according to Shrikant Chouhan, head of equity research at Kotak Securities, should focus on 19,400/64,900 as the key resistance levels for the Nifty/Sensex. In a worst-case scenario, he expects the Nifty to fall below the 19,000 mark as the overall market structure remains weak.

“In the worst-case scenario, the Nifty may even drop to 19,000 or 18,900 levels. Short-term sentiment may change if it rises above 19,400 (Nifty)/64,900 (Sensex), which could lead to a quick technical bounce to 19,500-19,600 on the Nifty and 65,200-65,500 on the Sensex. It is recommended to reduce weak long positions around the level of 19,500. Conversely, investors are advised to buy between 19,050 and 18,950 levels,” he said.