Is it a good idea to bet on mid, smallcaps ahead of Election 2019 outcome?

RSI is trading in oversold territory and a Golden cross may give rise to accumulation

Uncertainty and the possibility of a sharp fall in the makets has gripped traders and investors over the past few weeks. While the sentiment at the global level has been dented given the US - China trade war fears, back home the mood has been impacted as the election outcome day (May 23) draws closer.

While most analysts expect the Narendra Modi - led National Democratic Alliance to win, they expect the overall tally to be less as compared to the initial projections when the elections kick started.
 

Building on its strong performance in March 2019, Nifty registered a marginal uptick of 1.1 per cent in April 2019. FPI flows ($1.65 billion) remained strong while DII flows were supported by non-discretionary flows turning positive and strong SIPs flows. However, the broader markets continued to underperform with the Nifty Midcap 100 slipping 3.8 per cent.

While most analysts remain optimistic on the road ahead for the markets, they are particularly bullish on the mid, and small-cap segments.

"After their sharp underperformance in 2018, mid-and small-caps appear relatively more attractive than a year ago. That said, it’s difficult to paint all small-and mid-caps with the same broad brush, given the divergence in their business models and growth opportunities, even in the same sector," said Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas in a recent interview to Business Standard. READ INTERVIEW HERE

TECHNICAL VIEW

That said, one needs to consider the risk involved in both these indices. Technical charts indicate a revival in trend as regards both these segments and signal a breakout on moving averages, if indices hold current levels.

Nifty Midcap: Currently, the 50-day moving average (DMA) is placed at 17,655 above the 200 DMA at 17,630 levels with a “Golden crossover” formation made three days ago. The trend indicates weakness, but the Relative Strength Indicator (RSI) is making an attempt to turn up, as it did twice recently when it was in an oversold territory.

If the index holds and trades above 16,200 levels for another two–three sessions, then it is possible that further buying may take it to 17,000 – 17,100 levels, which is also the breakout range for a positive 'Golden Cross". In case the index breaches 16,200 on the downside, then one needs to avoid this segment and stay away for a while. A significant relevance of 200-weekly moving averages (WMA) also helps to look for buying opportunities, which the index has honored in the last two major corrections. CLICK HERE FOR DETAILED CHART VIEW 

Nifty Smallcap: The index is in the process of making a positive crossover, “Golden Cross” that may induce buying strength going ahead. One of the reasons as to why this index has not seen recovery is due to lack of follow-up buying. At the current levels, the index needs to determine whether it can hold the gap-up range of 5,943 - 5,961. If that happens, it may lead the index to the 200 DMA, an average that it has failed to conquer from in the last 10 months. A “Golden Cross” suggests a recent correction is will test the significant support range. If the index manages to hold on to these levels for another two–three sessions, then a crossover may lead to 6,400 and 6,600 levels, as per the chart. CLICK HERE FOR DETAILED CHART VIEW