Nifty Overextended On Technical And Valuation Front : India VIX is placed at a curious juncture

The first half of January 2021 looked very much like the final quarter of the last year. The key benchmark indices were pushed higher boosted by optimism on vaccine rollout, betterthan- expected start to Q3 earnings with IT bellwether TCS reporting its strongest third quarter growth in nine years and all the verticals showing good sequential growth. The long list of tailwinds does not end here as we are yet to talk about the most important tailwind i.e. FIIs’ flow in equities. FIIs, who have poured in over Rs 48,000 crore in equities in December 2020, are already net buyers with inflow of nearly Rs 13,000 crore so far in January. 

With this, the Nifty has gained for nine weeks out of the last 10 weeks and only one week which we had a negative close; Nifty registered a loss of 11 odd points. Meanwhile, the market capitalisation of BSE-listed companies also touched a new high. On Tuesday, the Nifty, for the first time, closed above the 14,500 mark. Along with this, Bank Nifty also touched its 52-week high despite the fact that the Reserve Bank of India (RBI) in its 22nd edition of the biannual Financial Stability Report cautioned over elevated NPA levels in September 2021. Such is the buoyancy in the markets that even red flags raised by the RBI in its recent report have been ignored by the market participants. The Nifty has moved roughly 3,000 points from the low of 11,535 to high of 14,590 in a span of just 10 weeks and with this it has now got highly overstretched not only from a technical perspective but also from the fundamental perspective. As for the index price-to-earnings (PE), it reached an high of 40x on Tuesday and on the technical front the daily and weekly stochastic oscillator hovered in an extremely overbought territory.

But on the other hand, the price is not showing any sort of weakness, even in the shorter timeframe. In fact, the dips are being bought, supported by rotational buying across the sectors. In the coming week, the zone of 14,367 – 14,383 is likely to act as a crucial support as its confluence gap area of January 11 and 5-EMA. As long as the index trades above the 5-EMA, be with a bullish bias and use dips to build long positions. Only a close below the zone of 14,367 – 14,383 and trajectory of 5-EMA turning down would be the first signs of weakness emerging in the index. In this case, we could go on to test levels of 14,040 – 14,100. On the upside, the level of 14,600 – 14,680 would act as a resistance zone. In our last write-up we had mentioned a seasonality analysis of India VIX wherein we had hinted that India VIX would start to rear its ugly head.

What we have witnessed is that the index is moving higher and India VIX is also moving higher, which definitely is not a good sign. The India VIX is now at a very crucial juncture as the zone of 24 – 26 is a resistance zone and if this time it breakout it and we could see immense volatility. With the Union Budget event lined up and the Q3 earning season picking up steam, one needs to keep a close watch on India VIX. The breakdown of 5-EMA and trajectory of 5-EMA turning down along with India VIX breaking out of the 24 – 26 mark would be a perfect treat for bears!

STOCK RECOMMENDATIONS

ADITYA BIRLA FASHION AND RETAIL ....... BUY .......CMP Rs 174.40

BSE Code : 535755
Target 1 : Rs 192
Target 2 : Rs 200
Stoploss : Rs 163 (CLS)

ABFRL is India’s leading manufacturing and retail branded fashion apparel company with top international fashion brands for men, women and kids. The stock price plunged sharply from a high of Rs 285.50 in February 2020 to a low of Rs 97 in May 2020. And, thereafter, following the entire upward movement from the low of Rs 97 in May 2020, it has been trading in a rising channel. The stock is trading above the 10-SMA, 20-EMA and 30-EMA moving averages, meeting the Dave Landry’s bow-tie setup. Elder’s impulse trading system is also giving a bullish signal in the stock. Along with this the upper Bollinger Band has started to expand, which is positive for the stock. The daily and weekly MACD is bullish as it stays above the signal line. Interestingly, the MACD histogram indicates that the bullish momentum is picking up. The RSI on the weekly chart after having taken support around its nine-period average is in a bullish zone and has marked a new swing high. On the daily chart as well, the RSI has seen a super bullish range shift and is in a rising trajectory. The +DMI is improving and much above the –DMI. Further, the +DMI is in a rising trajectory along with the ADX while the –DMI is sliding down, which is positive for the stock. Considering the above, we believe the stock has the potential to test levels of Rs 192 followed by Rs 200 in the medium term. We would advise to maintain a stop loss of Rs 163 on a closing basis.

BOSCH ........... BUY ......... CMP Rs 14,626.10

BSE Code : 500530
Target 1 : Rs 15,820
Target 2 :  Rs 17,260
Stoploss : Rs 13,600 (CLS)

In India, Bosch is a leading supplier of technology and services in the areas of mobility solutions, industrial technology, consumer goods, and energy and building technology. Additionally, Bosch has, in India, the largest development centre outside Germany for end-to-end engineering and technology solutions. The stock has recently broken out of nearly six months’ long consolidation along with decent volumes. It is trading above all the short and long-term moving averages. The stock is trading at 21.33 per cent above the 200-DMA and 14.74 per cent above the 50-DMA. All the moving averages are trending upside and they are in sequence. Among the oscillators, the weekly 14-period RSI is in a bullish zone and is seen rebounding, taking support at its nine-period average. On the daily chart the RSI is above the prior swing highs, which bodes well for the bullish momentum. The MACD is above the signal line which is positive for the stock and at the same time the histogram indicates that the bullish momentum is picking up. The stock is clearly in an uptrend and the trend strength is strong. The Average Directional Index (ADX), which shows trend strength, is as high as 25.74 on the daily chart. Generally, above the 25 level is considered as a strong trend. The +DMI is above the –DMI, which is a bullish sign. All in all, the bullish momentum is likely to continue in the stock and in the near term it may head towards the level of Rs 15,820 followed by Rs 17,260 in the medium term. The stop loss for the trade would be around Rs 13,600 on a closing basis.

(Closing price as of Jan 12, 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.