DSIJ Mindshare

BUY OR SELL? TAKE A TECHNICAL HINT!

The Indian equity market started the year 2015 with towering optimism and the first two months of the year lived up to the expectations with January and February delivering positive returns of 6.4 per cent and 1.1 per cent respectively.  Week after week the market was seen to be scaling new highs and it looked like a clear victory run for the bulls. This fuelled further hope among market participants who began to see this as a long-term rally. Even some of the most experienced negated the possibility of a sell-off, assuming that fundamentals, technicals and sentiments no longer mattered and that the momentum would continue unabated.

Nonetheless, the complacency caught investors off-guard. After shooting upwards in a straight line for quite long, the stock markets began to retrace or take a pause, as is mostly the case. It’s a cardinal rule of the equity market and it came into play this time too. March, as such, proved to be harsh for investors and traders with the stock market witnessing a huge sell-off. The Nifty index fell by over 500 points from its recent peak and shed about 6 per cent.

The two successive months of gains followed by a huge sell-off has left investors and traders in a tight spot as they have been caught on the wrong side of the trade with sentiments turning hawkish. So what should you do in such uncertain times? Should you average out your existing position in this correction or wait on the sidelines till the dust settles? To come to a firm conclusion let’s dive into history and get an idea how the trend will be for April.  Since 1994 there have been five instances where we have had fabulous returns in the first two months of the year followed by a negative return in the third month. These have been for the years 1994, 1997, 2000, 2002 and 2012.


Year

Jan

Feb

Mar

Apr
1994 15.00 8.30 -12.80 -2.2
1997 8.12 2.70 -3.11 11.52
2000 4.44 7.02 -7.63 -8.00
2002 1.54 6.20 -1.10 -4.00
2012 12.43 3.60 -1.7 -0.9
2015 6.40 1.10 -6.3

 

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In the five instances since 1994 when we have seen positive returns in January and February followed by negative return in March, we have four negative returns in April ranging from -0.09 per cent to -8.00 per cent and one positive return of 11.5 per cent in 1997. The data illustrates that April has not been kind to market participants if January and February gave positive returns followed by negative return in March. Nonetheless, let us see what the charts are saying this time.

Technical Perspective on Nifty

As per the weekly time frame chart, Nifty has witnessed a decent up-move after forming two consecutive Dragonfly Doji Candlestick patterns around March 2013.

The primary trend on the weekly chart clearly exhibits a clear-cut bull run from March 2013.

In the past couple of years, Nifty during its higher top formations as per the weekly time frame has demonstrated strength during its up-move with good participation from the broader market.

During the first week of March 2015 Nifty formed a Doji Candlestick pattern which is considered a sign of possible reversal of price direction. However, confirmation is required by the next candlestick.  In the next week confirmation was provided by a big bearish candlestick pattern with open=low and the market entered into a correction phase.

On the current weekly time frame, Nifty has breached the lower end of a Rising Wedge pattern. This pattern is an indication that an uptrend may soon reverse with downside price action to follow.  This pattern is formed on the chart when the price moves upward with pivot highs and lows joining toward a single point know as the apex. There is in use two trend lines, one for drawing two or more pivot highs and a trend line connecting two or more pivot lows.

However, this negative pattern’s significance is of lower magnitude as the primary trend, which is defined by the bullish sequence of higher tops and bottoms, is intact and the swing low of 7,961 which was formed in mid-December 2014 is considered as higher bottom in the sequence, and is still holding up.

If Nifty managed to breach its higher bottom i.e. level of 7,961 on a weekly basis, the primary trend will be dented and confirmation of a fresh downward leg correction will emerge.

In the above case correction up to levels of 7,591 cannot be ruled out.

However, we feel that opportunities often occur when things look bleak. The DSIJ team has identified best trading opportunities with reference to technical tools and studies for short to medium term with five buy and five sell recommendations. All the prices are taken as on March 27, 2015.

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Buy Recommendations

1: Century Textile & Industries

CENTURYTEX | BSE CODE: 500040 | FACE VALUE: Rs 10 | CMP: Rs 608

The stock is currently trading at Rs 608. Its 52-week high/low at Rs 664.40 and Rs 328.20 were made on July 21, 2014 and April 30, 2014. The daily timeframe chart of the company indicates the formation of a larger degree of consolidation pattern after registering its 52-week high of Rs 664.40. In this process the stock formed a potential inverted head and shoulder pattern with neckline resistance at around the level of Rs 604-606. Currently the stock price has breached its neckline resistance zone along with rise in volume. This is positive for the underlying trend of the stock and it signals that the bulls are gaining control to push the prices higher. Daily momentum oscillators like the 14-period RSI has turned up above the 60 level. This indicates a strengthening of upside momentum. Bullish chart pattern and supportive momentum indicators suggest buying the stock with closing below stop loss of Rs 528 with a price target of Rs 685 and Rs 740.

2: Aarti Industries

AARTIIND | BSE CODE: 524208 | FACE VALUE: Rs 5 | CMP: Rs 325

The stock is currently trading at Rs 325. Its 52-week high/low at Rs 377.40 and Rs 118.50 were made on March 18, 2015 and March 27, 2014. The daily timeframe chart of Aarti Industries has witnessed a breakout of inverted head and shoulder pattern as on March 9, 2015 along more than average volumes. This is positive for the trend of the stock which went on to register a new high of Rs 377.40. Near its 52-week high the stock formed a bearish engulfing candlestick pattern and saw a healthy correction. Currently stock is nearing its re-test of the neckline support zone. The fall from the top has been witnessed with thin volumes and the daily momentum oscillator like the 14-period RSI is trading near the 50-odd levels. This suggests that the stock will resume its uptrend and is likely to re-test its high. Looking at the consolidation and positive structure, it is anticipated that the stock will rise further in the coming weeks. So accumulate this stock in the range of Rs 305-315 for upside target of Rs 360-375 with closing below stop loss of Rs 274.

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3: Godrej Industries

GODREJIND | BSE CODE: 500164 | FACE VALUE: Rs 1 | CMP: Rs 345

The stock is currently trading at Rs 345.50. Its 52-week high/low at Rs 372.73 and Rs 261.45 were made on July 7, 2014 and December 16, 2014. The weekly timeframe chart of Godrej Industries has witnessed breakout of a triangle-like pattern in the last week of February 2015. Post this pattern the stock has seen good consolidation around its breakout levels. It indicates the formation of a larger degree of consolidation pattern for the past year or so with the upper range in the zone of Rs 332-336. Currently the stock has managed to pierce its upper range of the consolidation zone along with higher top and higher bottom sequence. This signals that the bulls are gaining momentum and are likely to push the price further up. On its weekly chart the stock has built up resistance at around the level of Rs 349. Once the stock breaches this level, expect it to move in the northward direction. Therefore one can buy in the zone of Rs 332-340 with closing below stop loss of Rs 301 for an upside target of Rs 374-395.

4: Cadila Healthcare

CADILAHC | BSE CODE: 532321 | FACE VALUE: Rs 5 | CMP: Rs 1654

The stock is currently trading at Rs 1,654. Its 52-week high/low at Rs 1,760.15 and Rs 872.10 were made November 11, 2014 and May 19, 2014. The daily timeframe chart of Cadila Healthcare has witnessed the breakout of a perfect consolidation triangle pattern as on March 17, 2015 along with more than average volume. Post this breakout the stock accelerated to touch a high of Rs 1,748.80 and after that it has entered into a consolidation and sideways movement. This consolidation and sideways has seen correction with slim volumes, which suggest that it is routine profit booking after an impulsive movement. The primary trend of the stock is still in favour of bulls as the stock has been trading above its 200-day SMA. The daily momentum oscillator like 14-day RSI is trading at around the crucial support level. Traders and investors should accumulate this stock in its current consolidation and sideways movement in the range of Rs 1,600-1,630 for an upside target of Rs 1,780-1,840 with closing below stop loss of Rs 1,535.

5: Voltas

VOLTAS | BSE CODE: 500575 | FACE VALUE: Rs 1 | CMP: Rs 274

The stock is currently trading at Rs 274. Its 52-week high/low at Rs 301.40 and Rs 148.30 were made on March 13, 2015 and April 30, 2014. The weekly timeframe chart of Voltas had formed multiple tops around the level of Rs 262-268. The stock has breached its multiple top patterns and managed to cross highs of 2007 and 2010 with formation of higher top and higher bottom sequence on the weekly chart. Now the stock is hovering around an important support level as defined by the upward rising trend line joined from its lows of Rs 64.75. We expect the stock to regain momentum after some consolidation. A weekly momentum oscillator is trading around 60-odd levels. The RSI is within a bullish high and low range of 85-50; one may expect it to move towards to the 85 level from its current reading of around 60 level. This signals a positive upward movement. We recommend accumulating this stock in the range of Rs 260-270 for upside target of Rs 310-330 with closing below stop loss of Rs 235.

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Sell Recommendations

1: Reliance Infrastructure

RELINFRA | BSE CODE: 500390 | FACE VALUE: Rs 10 | CMP: Rs 421

The stock is currently trading at Rs 421. Its 52-week high/low at Rs 819.90 and Rs 400.35 were made on June 10, 2014 and February 10, 2015. The daily timeframe chart of Reliance Infrastructure has formed a Bearish Engulfing candlestick pattern along with good volumes and is showing negative bias for the medium-long term as the stock has been consistently trading below its 200-day SMA for a long time. It has witnessed a breakdown of its triangle pattern which is a significant bearish indication for short to medium term. In addition, the daily momentum oscillator like 14-day RSI has formed multiple tops around the 60-65 odd levels and formed a bearish pattern which is lower top and lower bottom sequence while slipping below the 40-odd level. This hints that the bears are in control. Traders could sell the stock on bounce at around the levels of Rs 432-438 with closing above stop loss of Rs 469 for target price of Rs 390-370.

2: Federal Bank

FEDERALBNK | BSE CODE: 500469 | FACE VALUE: Rs 2 | CMP: Rs 131

The stock is currently trading at Rs 131. Its 52-week high/low at Rs 154.40 and Rs 86.75 were made on March 4, 2015 and April 30, 2014. The daily timeframe chart of Federal Bank has slipped below its important support of Rs 134.5 as defined by its 200-day SMA. This indicates that the stock is showing negative bias for the medium to long term. It has been trading in a rectangle range since January 2015 where the range on the higher side was around Rs 154 and on the lower side was Rs 133-132. On March 27, 2015 the price of the stock slipped below the lower end of the rectangle range, indicating bearishness. The stock has also witnessed a break of its neckline support of the head and shoulder pattern. The daily momentum oscillator of 14-day RSI is showing a negative pattern which is lower top and lower bottom. Considering the bearish set-up one can execute short position in the stock at around the level of Rs 133-134 for a target price of Rs 123-116 with closing above stop loss of Rs 144.

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3: Wipro

WIPRO | BSE CODE: 507685 | FACE VALUE: Rs 2 | CMP: Rs 613

The stock is currently trading at Rs 613. Its 52-week high/low at Rs 677.60 and Rs 474.70 were made on March 11, 2015 and May 19, 2014. The daily timeframe chart of Wipro formed a double top pattern around the level of Rs 677. Currently the stock has witness breakdown of its upward rising trend line along with rise in volume, which is a bearish indication for the short term. The day’s action formed a strong bear candle which is negative for the stock. Its price has started sliding below its important retracement support of 38.2 per cent. If the stock closes below the level of Rs 608 the intermediate trend will shift in favour of bears and the stock may slide down to the level of Rs 565-570 to fill the gap which was created on January 19, 2015. The daily momentum oscillator of 14-day RSI is showing a negative divergence. Considering the current weakness and bearish pattern in stock, it is one of the candidates for creating a short position with closing stop loss of Rs 644 for a target price of Rs 580-565.

4: Power Finance Corporation

PFC | BSE CODE: 532810 | FACE VALUE: Rs 10 | CMP: Rs 264

The stock is currently trading at Rs 264. Its 52-week high/low at Rs 344.75 and Rs 179.60 were made on June 9, 2014 and April 17, 2014. The daily timeframe chart of Power Finance Corporation has slipped below its important support level of Rs 280.72 as defined by 200-day SMA. The stock has formed a bearish rectangle pattern; this pattern is formed when the price consolidates for a while during a downtrend. Along with a bearish rectangle pattern, the stock has also seen a breakdown of its descending triangle pattern along with good volumes. This pattern indicates that downside momentum is likely to continue. The daily momentum oscillator of 14-day RSI has breached important support of 40-odd levels, hinting that the price is likely to move downwards. Considering the weak trend of the stock and the combination of two bearish patterns, this is a perfect opportunity to short the stock with closing above stop loss of Rs 283 for a target price of Rs 248-235.

5: Bata

BATAINDIA | BSE CODE: 500043 | FACE VALUE: Rs 10 | CMP: Rs 1080 

The stock is currently trading at Rs 1,080. Its 52-week high/low at Rs 1,496 and Rs 998 were made on January 22, 2015 and May 6, 2014. The daily timeframe chart of Bata has breached important support as defined by horizontal trend line along with rise in volume. The stock, after touching its 52-week high of Rs 1496, has made a sequence of lower top lower and bottom pattern which indicates that it is in the grip of bears. The stock has been trading below its 200-day SMA for the past couple of weeks; this hints that the weakness likely to persist as the long-term trend is downwards. The daily momentum oscillator of 14-day RSI has slipped below the level of 30 and now has entered into an oversold zone, hinting that the stock may see some pullback. This could be used to initiate a short position around the levels of Rs 1,085-1,110 with a price target of Rs 1,000-982 with closing above stop loss of Rs 1,178.

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