Evidence Of Discomfort At Higher Levels

Strong Follow-Through Will Decide The Next Course Of Action

The week gone by was quite a dramatic one and it was no less than a Bollywood masala movie, where we saw a gap down followed by a comeback and a cool-off on the last trading session of the week. However, what was surprising to see was that the benchmark index NSE Nifty moved in a wide range of 745 points. This was despite the fact that the big institutional participation was missing as generally, the institutions lie low during the year-end holiday season. 

The start of the week on D-Street was quite terrible as a nerve-racking fall was witnessed which brought down the price to levels that many had hoped they wouldn’t see. As a result, there was a situation of fear on Dalal Street. But once again the smart market participants indulged into ‘buy the fear, sell the greed’ and testimony of this is the fact that Nifty rallied for the next three days (Tuesday- Thursday). But on the final day of the week, investors preferred to book profits and go light on the weekend amid Omicron fears which resulted in a minor throwback from its 20-DMA.

As a result, the headline index ended the week with modest gains of 0.11 per cent. With this, it ended the rhythm of two down weeks, followed by two weeks of pullback. Meanwhile, the performance from the broader markets was mixed wherein the Nifty Smallcap 100 index closed flat and the Nifty Midcap 100 index declined 1.1 per cent, thereby underperforming the headline index.

Technically, Nifty has formed a candlestick pattern that resembles a hammer pattern, but it’s not classical as it has an upper shadow too. But the formation of such a candle after a decline and near the support area (40-week moving average) hint at a potential reversal. However, we will need confirmation in the following week. Concurrently, the candlestick formation on Nifty Midcap 100 and Smallcap 100 index too has a long bottom tail (long lower shadow), justifying the saying of ‘the tale lies in the tail’. The long bottom tail shows that the extreme lower end of the price that was once touched could not be sustained. It saw buyers rushing to buy at lower levels and as a result, the falling price found support and it got arrested. While the sellers who sold in anticipation that the index would fall further found themselves trapped.

There is one interesting observation in which last week candle formation on the Nifty Smallcap 100 resembles the weekly candle formation seen on the weekend of December 3. Interestingly, the range of the candle is also identical. Also, one more compelling observation is that Nifty 50 and Nifty Midcap 100 indices breached their swing lows, which were formed on November 29, 2021. But despite witnessing such havoc on Monday, Nifty Smallcap 100 index has managed to hold onto the swing lows of November 29, 2021. So, the Nifty Smallcap 100 index demand special attention.

Talking about pattern formation, Nifty 50 and Nifty Midcap 100 have been forming a similar kind of pattern. Both the indexes have been forming a descending channel pattern. A breakout strategy suggested here would be buying when the price breaks above the channel. In the case of Nifty, the breakout level of descending channel pattern is placed around the zone of 17,340-17,400. Also, the 100-DMA is placed at 17,395, hence, the zone of 17,340-17,400 would be the key level to watch for the coming fortnight. Meanwhile, in the Nifty Midcap 100, the breakout level of descending channel pattern is placed around 31,000-31,050 zone.

The long bottom tail indicates reversal on the cards, but indicators are indicating a contrasting story. For the first time after April 2021 on the weekly chart, the negative directional movement (-DI) has crossed over the positive directional movement (+DI). MACD histogram shows that the bearish momentum is picking up. RSI is below its nine-period average.

All-in-all, a strong follow-through action is key in the coming weeks and sustaining above the level of 17,340-17,400 levels, Nifty can scale towards levels of 17,640-17,850. Whereas, on the downside, the level of 16,780 would be crucial to watch out for.

STOCK RECOMMENDATIONS

COFORGE LIMITED ............ BUY .......... CMP Rs 5,619.70

BSE Code : 532541
Target 1 : Rs 6,050
Target 2 : Rs 6,300
Stoploss ; Rs 5,300(CLS)

CoForge, formerly known as NIIT Technologies, is an Information Technology (IT) solutions company, primarily engaged in providing computer programming consultancy and related activity. The company is backed by strong financials and has reported consistent increasing revenues and net profits.The stock has successfully been able to generate returns for its investors, as it has delivered massive 107.75 per cent returns since January. In the short period of one month too, the stock has delivered 6.69 per cent returns, thus outperforming most of its peers. Technically, the stock is on a verge of breaking out of a triangular pattern on the daily chart which is formed in the last two months. Interestingly, within this triangular pattern, there is the formation of a flat base like pattern and the stock has already witnessed a break out of this pattern after forming a strong base around the 100-EMA. Furthermore, the breakout of the flat base pattern is accompanied by a surge in the volumes. Also, the stock is meeting most of the CANSLIM parameters and interestingly, the scrip is meeting the investment rules of Warren Buffett. The MACD gave a fresh buy signal last week and the histogram shows a strong momentum. The elder impulse system shows a bullish sign. ADX on the weekly chart is above 40, while the positive directional indicator (+DI) is seen taking support at 25 level and it is above the negative directional indicator (-DI). One can buy this stock above in the range between 5,550-5,630 with a stop loss of Rs 5,300. The short-term target is Rs 6050, and the medium target is Rs 6,300.

GOODLUCK INDIA LIMITED ............. BUY .............CMP 335.40

BSE Code : 530655
Target 1 : Rs 370
Target 2 : Rs 385
Stoploss : Rs 316 (CLS)

Goodluck India Limited is an engineering product manufacturing company engaged in manufacturing and exporting a range of automobile cold-drawn welded tubes, forged engineering products, transmission and distribution towers and boiler structures etc. The company has generated constant net profits over the years and has remained consistent in its business. The company has also outperformed many of its peers. Their strong fundamentals have been reflected in the stock price, as the stock has delivered massive returns of 512.70 per cent on a year-to-date basis. In a month, the stock has generated over 23 per cent returns. This shows the quality of the stock and the potential it has in the coming days. The stock is at the cusp of generating a breakout above the last nearly four-month-long consolidation, signalling a resumption of the up move and offering a fresh entry opportunity. Volume has been increasing in the last couple of trading sessions which means sooner or later the stock would witness a breakout of this long consolidation pattern. The stock is meeting the majority criteria of CANSLIM. It has an EPS rank of 95 which is a great score indicating consistency in earnings. An RS rating of 94 which again is great indicating the outperformance as compared to other stocks. Buyer demand indicates interest in the stock. As the stock is trading at all-time highs, all the trend indicators are showing that the uptrend continues. The 14-period RSI is in super bullish territory and MACD is in buy mode as well. +DI line is above the ADX and -DI line and it is moving northward while staying above the 25-mark, which indicates the trend is strong. One can buy this stock above Rs 340 with a stop loss of Rs 316. The short-term target is Rs 370, and the medium target is Rs 385.

*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 Dec 27, 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.