Remain With The Trend

Keep a close eye on India VIX as seasonality suggests we are in for a wild ride in January

The last couple of weeks in December played out as expected. In fact, we had clearly advised through our earlier editorial columns not to fight the trend but be with it. Even though we saw the sharpest single day sell-off since May 2020, which was triggered on the back of the discovery of a new strain of corona virus in the United Kingdom, the markets found its mojo back with indices scaling to fresh all-time highs as US President Donald Trump signed the fiscal aid bill and AstraZeneca chief claimed that the vaccine would be effective against the new UK strain.

From our last update, the Nifty is up by nearly 2.70 per cent despite a big red flag seen on December 21. Two of the prominent sectors which helped indices in the last couple of weeks were Nifty IT and Nifty Pharma. During the same period, Nifty IT was up by nearly 7 per cent and Nifty Pharma was up by nearly 3.5 per cent. Moreover, all the components of Nifty IT and Nifty Pharma have delivered positive returns. Further, the FIIs inflows continue to buoyant as they have been net buyers to the tune of Rs 45,263 crore month till date. Since from the above paragraph it is clear that Nifty IT and Nifty Pharma aided Nifty to drive higher, let us now examine some interesting analysis based on seasonality performance, which will give us an idea whether these two sectors would continue to help the index to get past the 14,000 mark. As per seasonality analysis for the month of January, Nifty IT index has a positive ratio of 65 per cent and this data has been analysed since 2004. Further, if we dig deeper into the data of the eight years there was only one instance when Nifty IT delivered negative returns i.e. in the month of January 2017. Moreover, there are instances when the index has delivered double-digit gains, as for example, in the month of January 2013 it delivered gains of 12.50 per cent and in January 2018 it delivered 11.32 per cent. Therefore, history suggests that the momentum is likely to remain in the Nifty IT index. Meanwhile, Nifty Pharma has a positive ratio of 44 per cent and this data has been analysed since the year 2012. Moreover, in the past five years there has been only instance – and that as recently as 2020 – when Nifty Pharma managed to give positive returns in the month of January. This clearly indicates that Nifty Pharma’s performance was not as strong as Nifty IT in the month of January. Thus, the Nifty IT sector is clearly where traders should keep eye on in the coming days. Coming back to Nifty, on Tuesday it rose for the fifth straight day and closed above the 13,900 mark for the first time ever. Despite closing at record high levels, the momentum was lacking and the testimony for this was that Nifty for the entire day moved in a range of 100 points and secondly, the advance decline ratio remained almost flat with an equal number of stocks closing in red for every single stock which rallied. Moreover, the price action formed a small body candle.

There is one interesting observation, which is that India VIX week-till-date has surged nearly 7 per cent and is trading above the 20-mark and if we analyse the seasonality of India VIX for the month of January, it is found to have a positive ratio of 75 per cent, Moreover, since 2014 the month of January has always witnessed an uptick and there are five instances when India VIX has surged in double-digits in month of January since 2014 with 49 per cent being the highest which we had witnessed in 2020. 

Going ahead, Monday’s gap area (13,771- 13,811) is likely to act as an immediate support level as it coincides with previous all-time high of Nifty and on the upside, the level of 14,000 would act as an immediate resistance as this a round number and a sustainable move above the 14,000 mark that could lead to the 14,200 mark. As there is no evidence of any sort of weakness on the chart, we reiterate that you should remain in tune with the trend and for traders who are still thinking about how long can it rise, we suggest keeping a close eye on India VIX and the gap area. A move above the 24 level on India VIX would be the first indication of fear returning to haunt traders. 

STOCK RECOMMENDATIONS 

ICICI LOMBARD GENERAL INSURANCE CO. ........ BUY ........CMP Rs 1510.55 

BSE Code : 540716
Target 1 : Rs 1,600
Target 2 : Rs 1,640
Stoploss : Rs 1,410 (CLS)

ICICI Lombard General Insurance Company is a general insurance company in India. It is engaged in general insurance, reinsurance claims management and investment management. The stock, for almost a year, faced supply (resistance) in the range of Rs 1,424-1,440 and finally in the last week of November it managed to clear this resistance zone along with a sizable bullish candle while the volumes too were above average. Thereafter, the stock made a high of Rs 1,530 and it entered into a counter-trend. During this phase the stock took support near the earlier resistance zone and hence this resulted into a change in polarity. The change in polarity principle indicates that once breached, a resistance level become the support level. Further, on the daily chart the stock has witnessed a breakout of a flag-like pattern, which indicates that after brief consolidation the stock has resumed its primary uptrend. The RSI in all the timeframes is trading in a bullish zone. The trend strength is extremely high. The Average Directional Index (ADX), which shows trend strength, is as high as 32.74 on the daily chart. Generally, above the 25 level is considered as a strong trend. The +DI is much above the -DI. This structure indicates bullish strength in the stock. On the weekly chart, the MACD was above the zero line since mid- November 2020. Considering above factors, we believe the stock is poised to touch levels of Rs 1,600 and 1,640 in the medium term and one can maintain a stop loss of Rs 1,410 on a closing basis.

AKSHAR CHEMICAL ....................... BUY ...................... CMP Rs 249.10 

BSE Code : 524598
Target 1 : Rs 270
Target 2 : Rs 276
Stoploss : Rs 225 (CLS)

The company is one of the fastest growing vinyl sulphone manufacturers in India and has emerged as India’s leading exporter of this product. The stock witnessed a strong rally of almost 28 per cent from a low of Rs 197.25 to a high of Rs 253. Thereafter, the stock witnessed a corrective decline and during this phase it halted near 61.8 per cent of the upward movement from a low of Rs 197.25 to a high of Rs 253. The stock also formed a reversal candle around the 61.8 per cent retracement level and one more important point to note is that during the corrective decline the volumes were low in comparison to the advance, which indicates routine correction. Also, during the corrective decline phase, the RSI did not hit oversold territory and very recently, the RSI crossed above the 60-mark on the daily chart. With this the RSI is in bullish territory in daily as well in the weekly timeframe. The ADX in the daily timeframe is the above 25 level and in the weekly timeframe it is above the 22 level. Moreover, it is in a rising trajectory which augurs well for the trend strength. The +DI is much above the -DI. This structure is indicates bullish strength in the stock. The daily MACD has generated a bullish crossover above its nine periods’ average, which is positive for the stock. We expect the stock to continue its upward movement and head towards Rs 270 followed by Rs 276. Traders can maintain a strict stop loss of Rs 225 on a closing basis.

(Closing price as of Dec 29, 2020)