NIFTY Index Chart Analysis

BEARS TIGHTEN THEIR GRIP

BEARS TIGHTEN THEIR GRIP

Before we begin let’s do a recap of what we had mentioned in our previous market update. We mentioned that the Nifty is likely to trade in a broad range of 8,750-9,450 and the markets behaved on a similar line as predicted. Further, we mentioned that one should stay light on banking and financials and the Bank Nifty index is about 19 per cent down for the month of May till date. I hope our readers would have been benefited with our view this time as well.

So over the last two weeks or so, Dalal Street has been on a roller-coaster ride as a slew of announcements globally and domestically have kept market participants on their toes. We have also seen how on the basis of these news flows on certain days the sentiments have changed overnight. Out of all the events, the most crucial event which everyone was talking about was the ‘Atmanirbhar Bharat’ package announced by Prime Minister Narendra Modi of Rs 20 lakh crore to help the country fight the fallout of the coronavirus pandemic. 

With this announcement the stage was set for the bulls, but the dominance of the bear was so prevalent that the wide gap up created by the PM’s announcement did not see any follow up action and there was a down gap on the following day. This clearly reflects that market participants have thumbed down the package. The fine print announced by the finance minister regarding the package as announced in five tranches was not taken well by the street. As a result we relatively underperformed our western US counterpart. The Dow has only dropped about half a per cent in the month of May till date, whereas Nifty, in the same period, has dropped more than 9 per cent.

An interesting technical pattern occurred after the big bonanza announcement of Rs 20 lakh crore package. The Nifty opened with a gap-up above its 20-EMA, partly fill the island reversal pattern formed on May 4 but it failed to overcome the resistance from its falling 50-EMA. Also, the May 13 open turned out to be the highest point of the day and it closed near its lows. This resulted into a formation of the bearish belt hold pattern. The formation of this candlestick pattern along with a gap-down opening on the very next clearly indicated the bears had tightened their grip and now it was matter of a time before the Nifty breached its important support of 9,000 on the downside. 

As on May 18, 2020, Nifty formed yet another bearish belt hold pattern which managed to break its all-important support of 9,000 and further it made a new swing low of 8,806.75. Also, on the same day, Nifty recorded its lowest close since April 8, 2020. Technically, if we look at the current set up, Nifty is trading below its key moving average and further, it has closed below the 38.2 per cent retracement of the prior rise from the lows of March 24 for the second consecutive day on Tuesday. Also, Nifty has added three distribution days. So this clearly presents a grim picture for the index. 

On the upside, as the principle of the change in polarity that was once breached, a support level becomes a resistance level and hence, going forward immediate resistance is placed in the region of 9,050-9,120. Until and unless Nifty moves and closes above this level with a sizable bullish bar it is a sell on a rise kind of environment. On the downside, the level of 8,700-8,800 is the last line of support as 50 per cent retracement level of the entire rise from the March lows is placed in this zone. Further, parallel lows are placed at 8,800-8,820. A decisive breach of the zone of 8,700-8,800 would open gates to another round of sharp selling which may take the index towards 8,419 which is 61.8 per cent retracement level of the rise from March’s low.

The RSI on the daily timeframe is at 42.65, while on the weekly and monthly time frame it’s below the 40 mark. The daily MACD stays bearish as it trades below its signal line. All-in-all, we would advise traders to be cautious at higher levels as most of the technical catalysts are inclined towards negativity.

STOCK RECOMMENDATIONS 

AARTI DRUGS ........................... BUY ......................... CMP Rs 766.70 

BSE Code : 524348 | Target 1 .... Rs 920 | Target 2 ..... Rs 950 | Stoploss....Rs 706 (CLS)

The company is engaged in the manufacturing of active pharmaceutical ingredients (APIs), pharma intermediates and specialty chemicals. Products under APIs include Ciprofloxacin Hydrochloride, Metronidazole, Metformin HCL, Ketoconazole, Ofloxacin etc. whereas specialty chemicals include Benzene Sulphonyl Chloride, Methyl Nicotinate, etc. The stock recently touched its all-time high level of Rs 874.90. Thereafter, the stock witnessed correction and corrected nearly about 38 per cent of the rise from lower levels of Rs 550 to Rs 874.90. On the larger time frame if you check the stock made an all-time high of Rs 874.90 in April 2015 and almost after five years the stock has hit the same level. So in the last five years the stock has been trading in the range of Rs 424 to Rs 874.90. A breakout above this level could result into a fast momentum on the upside. On the upside the stock may touch levels of Rs 920-950. The stock is also meeting majority of the CANSLIM parameters. Its price strength is 95, and the EPS strength is as high as 89. The institution has increased their stake by 4.29 per cent in the quarter ended March 2020. Its industry group rank is 24. Further, the stock meets majority criteria of the Mark Minervini’s trend template. The RSI on the weekly timeframe is in the bullish territory and on the monthly time scale too it is in bullish territory. On the daily timeframe the RSI has turned up from 57 and as per the supper bullish range theory when a stock is in a strong uptrend, it is seen that the RSI refrains from dipping below 60. Buy this stock with a stop loss of Rs 706 for a target of Rs 920-950 on the upside. 

JB CHEMICALS & PHARMACEUTICALS .............. BUY .......... CMP Rs 613.05

BSE Code : 506943 | Target 1 ..... Rs 710 | Target 2 ..... Rs 740 | Stoploss....Rs 580 (CLS)

The company is widely committed to manufacturing a range of innovative specialty products that include various pharmaceutical dosage forms like tablets, injectable (vials, ampoules, form fill seal), creams and ointments, lozenges, herbal liquids and capsules. The stock has witnessed breakout in the early part of the month of May 2020 with strong above average volumes. Post the breakout the stock went on to register a fresh all-time high of Rs 660. There after the stock has been seen moving in a sideways to corrective phase. This is a very common phenomena seen in the stock that after a strong direction move the stock tends to move sideways for certain period of time before the next leg of up-move. During this minor corrective to sideways phase, the stock has managed to sustain above its rising 20-DMA and during this phase of minor corrective has been seen on back of subdued volumes. The stock meets criteria of the Mark Minervini’s trend template. Further, most of the CANSLIM criteria are also met by the stock. The price strength of the stock is 96 and the EPS strength is 93. The buyers demand is A+. The FIIs and mutual funds have increased their stake in the stock in the quarter ended March 2020. Group rank is 24. Considering the technical setup and also for the fact that the stock looks attractive even fundamentally, we recommend buying this stock with a short term target of Rs 710-740 with a stop loss of Rs 580. 
(Closing price as of May 19, 2020) EMA - Exponential Moving Average.  MACD - Moving Average Convergence Divergence  RMI - Relative Momentum Index ROC - Rate of Change  RSI - Relative Strength Index
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.