Index trend and stocks in action on August 17, 2020

There is a famous saying on D-Street, i.e. ‘when the stock market rises, it’s like blowing up a balloon and when it falls, it’s like letting all of the air out’. The same was displayed on D-Street on Friday.

Nifty moved higher at a snail’s speed as it was forming narrow range candles and indecisive bars but on Friday, a sudden and surprise visit by the bear’s army turned the market upside down. As a result, Nifty ended the day with a sharp loss of over 1 per cent and the day’s spread stood at 255 points, which is above the 10-day average and the highest since June 24.

Despite the sharp loss on Friday, Nifty ended with a minuscule loss of 0.32 per cent for the week.  Moreover, it has formed an NR4 on the weekly time scale, which means that the current week range is lowest in amongst the last four weeks.

Multiple attempts went in vain to breach the sturdy wall of resistance, which was present in the zone of 11,340-11,380 in the form of a 78.6 per cent retracement level and the weekly rising trendline.

Nifty on Friday slipped below the last four days’ trading range and it has also breached the rising trendline support on an intraday basis but it took support around 21-EMA and managed to defend the trendline support on a closing basis.

Since the last week of May 2020, the 21-EMA has acted like a sheet anchor for the bulls. On Friday, it was the fourth time that it had taken support near about the 21-EMA and bounced back. However, it would be interesting to see whether history repeats itself or not after reverting to 21-EMA. So, will bulls regain their momentum and pierce through the sturdy wall of resistance, which is located in the zone of 11,340-11,380 in this attempt?

Well, to do that, we would have to look for some of the index pivotal as to how are they placed as well as to check indicators of the index.

Reliance Industries, Infosys, and TCS are the three stocks, which are amongst the top five heavyweights. If we analyse the charts of these three stocks, we could actually make out where these stocks are likely to take the index.

Reliance Industries, which has become the pied piper of Nifty50 after forming a green mother bar on August 4, and it has since been moving in a sideways phase and witnessed a volatility contraction.

Infosys and TCS also witnessed a similar sort of volatility contraction phase and as per the trading rules of Toby Crabel, a period of contraction or rest is followed by expansion in volatility. Hence, if these stocks are going to witness an expansion in volatility, the index is also likely to witness some volatility. With the resurgent of India VIX as it jumped nearly 6 per cent on Friday, expect the next week to be a volatile one.

Now digging deeper into the indicators, the weekly RSI is turning exactly from the 60-mark and on the daily time scale, the RSI formed a negative divergence and has witnessed a negative crossover. Now in the coming days, it would be interesting to see whether it takes support at the zone of 52-54 or pierce through this. The MACD histogram, which is showing a bearish momentum since the beginning of this month, has increased on Friday. All these signs are showing a weakness in the trend.

The immediate support for the index is placed at the low of Friday’s session, i.e., at 11,111 level and a breach of this support level would empower the fierce bears as the next support is placed around 10,960 levels. Meanwhile, on the upside, immediate resistance is seen around the levels of 11,250 and the impact of bears would start to weaken, only above this level.

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