Small-Cap Indices Break Out As Nifty Continues To Be Range-Bound

After enjoying a mostly bullish week, the NIFTY felt the heat on Friday, falling 0.45 per cent. The selloff was triggered by the U.S killing of a top Iranian commander in a drone strike, an act that sent oil prices shooting up 4 per cent and triggered shock waves across global markets. Brent hit nearly 70 USD/ bbl and the rupee plunged 0.42 per cent as a result, closing at a 6-week low against the US dollar. FPIs booked profits in the first three trading sessions of 2020, pulling out in excess of Rs 2400 Crores on a net basis.

On the technical front, it's worth noting that we’ve witnessed an extended stay in the overbought momentum zone on the weekly charts. In a situation like this, a retracement - be it time, price, or both - becomes almost inevitable. However, the upward sloping middle Bollinger band indicates that this retracement isn't likely to be an aggressive selloff, but rather could be a more meandering pause with a drop of a couple of hundred points in the index. The broader trend most certainly remains bullish.

More notably, we had the most interesting post- squeeze breakout in all major small-cap indices last week. Another technical indicator, the small-cap to SENSEX ratio, hit a level known informally as the "rebound line". The writing is on the wall - the beleaguered small caps that went into their shell after their spectacular performance in '17, are all set for a very healthy rally going forward. It's a good time as ever to add them to your portfolio, after a thorough suitability assessment based on your risk tolerance, of course.

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