NIFTY Index Chart Analysis : CAUTION IS THE NAME OF THE GAME
The Indian stock market is discounting all the negative factors, like it did in March 2020. When the nationwide lockdown was announced, the market actually made a bottom and bounced back sharply. This time, the market has formed a base since February 26, when the second wave of the pandemic started to rear its ugly head. Since then, the market has moved in a broader range of 15,044-14,150 zone. The price moved in a slopping channel, but it also formed parallel highs at the 14,800-15,000 zone. In one way, the pandemic conditions did not impact the market direction much; however, time correction was witnessed after a stupendous rally from the March 2020 bottom. Now, it has decisively broken out of the broader range.
In fact, it registered a strong breakout on Tuesday with a big gap up. As long as the Nifty sustains this breakout, the market is likely to witness new highs. This 37-day flat base also looks like an inverted head and shoulders, which is bullish. It has also broken out of an ascending triangle. These two pattern breakouts will result in a sharper upside move most of the time. The benchmark index is trading 2.51 per cent above the 50-DMA and 2.98 per cent above the 20-DMA. During the entire flat base zone, the 50-DMA remained flattened. The index has oscillated around the 50-DMA and 100 -DMA, with 100-DMA offered good support during destress times. The Bollinger bands flattened and are not showing any strong trend.
In normal conditions, the breakout is very powerful, as it is followed by a strong base. Except for 3-4 days, the Nifty traded mostly in or above the Ichimoku cloud. It hardly fell 8-9 per cent from the lifetime high. The RSI never went into an oversold condition. During the last 59 days, the daily cash volumes are declining. After the April 22 low, the index has formed higher lows and higher highs. The trend strength indicator, ADX, declined during this period and indicated the weakening of the bearish strength. The positive directional indicator, +DMI, is almost near the February 16 high. Importantly, the leading indicator, RSI, moved out of the rising channel and above the prior swing highs. This move negated the negative divergence’s bearish implications.
The above technical parameters are all showing a solid bullish price structure after prolonged consolidation. As the index is above the 50-DMA and the number of distribution days (three) are less so that this is a positive sign. Only in the case of a decline below the 50-DMA and the addition of distribution days will the market structure change into neutral again. Without trying to predict the future price action and decoding future implications, it is better to be with a positive bias as long as the Nifty trades above the 50-DMA (14,738) and 14,880 zone. In any case, if the Nifty fails to witness follow through buying and slips below 14,880, this would result into a fourth failure breakout.
In short, the support zone for the market is 14,739-14,880 and the resistance zone is at 15,157-345-431 zone. These levels are very important for the next two weeks. The much broader index, which represents 95 per cent of market capitalisation and a combination of large, mid and small-caps, closed with a record high. This is because of mid and smallcaps outperformance; the overall market negated the decline. The Nifty Midcap 100 was also at a new lifetime high. When the large-caps are subdued and in counter trend consolidations, these lesser caps are leading the market direction.
The Review of Relative Rotation Graph (RRG) shows that defensive sectors like pharmaceuticals, FMCG and IT will play an important role in protecting the market from the big crashes in the near future. These three sectors are in the improving quadrant and moving towards the leading quadrant. The metal sector seems to be in an overbought state and witnessing profit booking as it is flattening in the leading quadrant. The energy sector is losing momentum. It failed to move into the leading quadrant and will fall once again into the lagging quadrant. All the other sectors are avoidable for now as all of them are in a lagging quadrant. Stay sector and stock-focused and remain cautiously optimistic.
STOCK RECOMMENDATIONS
HINDUSTAN ZINC LTD. ...................... BUY ...................... CMP Rs 345.45
BSE Code : 500188
Target 1 : Rs 388
Target 2 : Rs 400
Stoploss : Rs 310 (CLS)
Hindustan Zinc is India’s largest and the world’s secondlargest zinc-lead miner. With over 50 years of operational experience and a reserve base of 114.7 million MT with an average zinc-lead grade of 8.7 per cent and mineral resources of 288 million MT, its mine life is over 25 years. The company’s fully integrated zinc operations currently hold 78 per cent market share in India’s primary zinc industry. The Government of India holds a stake of about 29.5 per cent. The company has a huge reserve base, which provides strong earnings’ growth. Technically, the stock is trading at a lifetime high. It has broken out of an 18-week flat base pattern. For the last four weeks, it was recording the highest volumes. It is above all the moving averages, and they are trending up. The MACD has given a fresh buy signal. The 14-period weekly RSI is in the extreme bullish zone. The ADX (37.58) shows strong bullish strength in the trend and is above the +DMI and -DMI. The +DMI is also rising and above the -DMI. Its relative price strength (RS) is rising and at 53. The stock is above the Anchored VWAP resistance. The stock is trading 14.53 per cent above the ten-weekly average. The Elders impulse system is in a bullish structure. In short, the stock recorded a clean breakout. Accumulate the stock between Rs 334-345. The short-term target is at Rs 388. The medium to long-term target is at Rs 400-477.
THIRUMALAI CHEMICALS LTD. ............... BUY ..................CMP Rs 116.20
BSE Code : 500412
Target 1 : Rs 138
Target 2 : Rs 162
Stoploss : Rs 104 (CLS)
Tirumalai Chemicals is a speciality chemicals’ company that has 15 strong products and a global presence in 34 countries. The company is one of the largest producers of Phthalic Anhydride (PAN) and Maleic Anhydride (MAN) and is among the few players globally to produce food ingredients and fine chemicals. Technically, the stock has broken out of a 23-week consolidation, with little over 30 per cent depth. The volumes are above the average. Its relative price strength is fair enough at 77 and the stock shows greater buyer’s demand. Institutional investors have increased their stake by 114.06 per cent during the last quarter. The stock is 22.87 per cent above the 10-weekly average. As the stock has broken out of a weekly base with good price strength, it is above the Anchored VWAP and prior pivot. The Elders impulse system is showing a bullish price structure. It is also retraced 38.2 per cent of the earlier fall. After a solid Stage 1 base, the stock is in a transition into Stage 2. The MACD has given a fresh buy signal. The 20-period RSI is above the prior swing high and in a bullish zone. The weekly ADX (22.95) is strong enough to show the trend strength. The +DMI is above the -DMI. Overall, the stock has a very strong bullish bias. Accumulate this stock between Rs 118-122 range with a stop loss of Rs 104. The short-term target is at Rs 138 and the medium to long-term target is Rs 162.
*LEGEND: EMA - Exponential Moving Average. MACD - Moving Average Convergence Divergence RMI - Relative Momentum Index ROC - Rate of Change RSI - Relative Strength Index (Closing price as of May 18, 2021)
Disclaimer : Above recommendations are based on various technical parameters and any fundamental input has not been considered for the recommendations. Follow strict stop loss for the recommendation.