Why Bank Nifty could extend rally as earnings season approaches

Bank Nifty has entered the earnings season on a strong footing, supported by improving price momentum and favourable historical trends. Anand James, Chief Market Strategist at Geojit Investments, points out that Bank Nifty has delivered positive returns in a majority of past earnings-led periods, with large-cap banks typically outperforming after rate cuts, keeping the near-term outlook constructive despite bouts of volatility.

Edited excerpts from a chat:

How do you read the momentum seen in the last 3 trading sessions which made the Nifty end up with 1% gain. How close are we to getting towards 26,400?
In the last three trading sessions, 51% of the upsides in Nifty came from just seven constituents, which has been largely the story since October. While this gives the feeling of a lopsided move, it must be noted that all but five constituents rose during the last three trading sessions, while almost 98% of the downside push came from just one stock, namely ITC. In other words, momentum is in indeed favour of extended upside, and we are looking for new leaders.

Nifty Bank hit fresh high and has been an outperformer. Ahead of the earnings season, how would you trade the index?
Historically, the third quarter has often been constructive for markets, though dispersion in returns has remained high, with nearly 65% of Q3s delivering positive returns over the past 20 years. This strength is typically driven by March, as the Union Budget and RBI policy announcements coincide, shaping rate-sensitive expectations and credit outlook.

January, however, has generally been mild with a negative bias—about 60% of the months in the last decade have ended lower. This trend can be attributed to early-month volatility triggered by Q3 earnings reports ahead of the Union Budget

Looking at monetary policy, a simple statistic on returns following an RBI rate cut shows that in 70% of the last 17 instances, Bank Nifty delivered an average gain of 2.8% in the subsequent month. Heavyweights like HDFC Bank and ICICI Bank, which together account for nearly 50% of the index, have posted positive returns 80% of the time in the month following a rate cut over the past 10 years.

Currently, Nifty Bank has started the year with about a 1% upside till Friday. If historical patterns hold, we could expect another 2% upside in the near term. Therefore, expect more buying opportunities, with a focus on large-cap banks ahead of earnings season.

Given the sharp sell-off seen in ITC shares, do you think the stock is now showing signs of being at oversold level? Is it time to buy the fear?
The bounce of 1.3% after two days of sharp sell off has got us interested in checking if the fear has peaked, and if it is time to enter. However, even though oscillators are oversold, we see this as a sign of strong downside momentum. The break of a head and shoulder pattern which had taken six months to form, adds to the weight of the bearish construct. That said, even though oscillators are yet to show any signs of reversal, it needs to be acknowledged that the stock has retraced 38% of the rise of 2020-2024, as well as fulfilled the first objective of the head and shoulder pattern. This provides a window for downside momentum to ease or even attempt a pull back, but with oscillators failing to confirm a signal, we would rather wait on the sidelines initially, until more signals emerge.

Force Motors was among the top gainers in the week. How would you trade the stock on Monday?
Force Motors has been on massive breakout move, but Friday’s doji, with large shadows on either sides, having come close to the record peak of 21990 seen last August, we are weary of fresh longs on Monday. Existing positions may be held with a stop loss near 20520 or 19700.

Give us your top ideas of the week

SENORES (CMP: 865)

View: Buy

Target: 910

SL: 838

The stock has been in a steady uptrend since May and entered a consolidation phase in November. This tight range movement witnessed a breakout on Friday, marked by a bullish Marubozu candle on both daily and weekly charts, supported by strong volumes. Trading comfortably above key moving averages with RSI hovering around 65, the momentum suggests a potential move towards 910 in the near term. Long positions can be maintained with a stop-loss placed below 838.

SAILIFE (CMP: 922)

View: Buy

Target: 959-1006

SL: 892

The stock has been consolidating within a narrowing wedge pattern since September and witnessed a breakout on Friday, supported by strong volumes. On the weekly chart, MACD is on the verge of a bullish crossover, while the 14-day RSI has moved above its signal line, reinforcing positive momentum in the near term. With the price holding firmly above key moving averages, we anticipate an upside towards 959 and 1006 in the coming sessions. Long positions should be safeguarded with a stop-loss placed below 892.