NIFTY Index Chart Analysis -NIFTY GETS INTO THE BEARISH ZONE

The Nifty witnessed a scintillating rally of 1,770 points from the Union Budget day lows to an all-time high of 15431.75 which was registered on February 16 and like it’s said that all good things come to an end, the bulls express too was derailed amid concerned about the renewed surge in corona virus cases in some Indian states and imposition of night curfews and some other restrictions on social and political gathering in states like Maharashtra, which is one of the major contributors to the national industrial output.  

In addition to this, the markets were also concerned about a sudden and sharp rise in domestic as well as global bond yields.Bond yields are largely inversely proportional to equity returns. Therefore, when bond yields surge, equity market returns tend to fade. And as a result, the Nifty which was extremely overvalued and looked overstretched found some excuses for a healthy correction as it has corrected 5.16 per cent from all-time highs. Meanwhile, on the expected lines, the broader markets have outperformed the frontline gauges.

The Nifty ended its two-week winning streak last week and formed a bearish engulfing candlestick pattern on the weekly chart. Bearish engulfing pattern is a two-candle reversal pattern. The first candle has a small real body which reflects a dissipation of the prior trend’s force and the second bear candle whose body is greater than the first candle proves an increase in force behind the new move. However, for any bearish implication, it will need a confirmation on the next bar.

Earlier whenever, the index has formed a bearish engulfing pattern at a lifetime high, it has led to severe correction in the index. In January 2018 it corrected nearly 11 per cent and in September 2018 it corrected about 15 per cent. Whereas, last year in January 2020, there was a bearish engulfing pattern formation at lifetime high and thereafter, we had witnessed one of the fastest bear markets in the history as it fell about 40 per cent.

One of the most important assumptions in technical analysis is whether history repeats itself. If it does so this time, expect an average correction of 12-13 per cent and if this happens than there is high probability we could test levels of 13,596 which also happens to be swing low of January 29. However, the test of 13,596 could only be possible if the index fails to hold at the support zone of 14,200-14,400.

Why the zone of 14,200-14,400 is an important zone for Nifty? Since late May 2020, the index has not sustained decisively below its 50-days EMA. There was one instance where it had breached the 50-days EMA but it did not sustain there for more than three days. Further, in the current scenario, pricewise the index has not corrected more than 8-9 per cent, hence if we calculate 8 per cent correction from the all-time highs it comes around 14,200-mark. In addition to this, the gap area of February 2 is placed in this region. Only a decisive close below the zone of 14,200-14,400 would open gates for severe correction towards the swing low of January 29.

The 14-period RSI on the daily time frame is at 49.36, while on the weekly time frame it's at 67, during January 2021 correction, RSI on the weekly time frame rebounded from 63 mark exhibiting resilience to lower prices and as per the super bullish range theory of RSI in a strong uptrend as it refrains from dipping below 60. Overall, the ongoing retracement would make market healthy from a larger term perspective and this would pave the way for the next leg of up move in the coming weeks. Technically, the index would get into the groove once it closes above the 20-DMA and form a higher highs and higher lows.
 

STOCK RECOMMENDATIONS

MOTHERSON SUMI SYSTEMS................. BUY ....................CMP Rs 219.70

BSE Code : 517334
Target 1 : Rs 240
Target 2 : Rs 245
Stoploss : Rs 199(CLS)

The company is one of the world’s leading specialised automotive component manufacturing companies for OEMs. With a diverse global customer base of nearly all leading automobile manufacturers across the world, it has a presence in 41 countries across five continents. The stock has witnessed a stupendous rally of about 364 per cent from its March 2020 lows and has recently registered a fresh 52-week high. During its rally from the March lows the stock has maintained its rhythm of higher highs and higher lows on a higher timeframe chart. During its uptrend phase the 20-week moving average has offered support multiple times and it has also respected the support of an upward rising trendline formed by joining the lows of March 2020, October 2020 and February 2021.

Recently, the stock touched its 52-week high ofRs230.50. However, post that it entered into a counter-trend phase which halted near the 38.2 per cent retracement level of the recent upward movement, which indicates further upward momentum in coming days. Also, the trend strength in the stock is extremely high as the Average Directional Index (ADX), which shows trend strength, is as high as 39.44 on the daily chart and 33.13 on a weekly chart. Further, the directional indicator +DI is much above the -DI, suggesting the bulls are in the driver’s seat. The MACD is in a rising trajectory which indicates positive bias. Considering the above mentioned factors we believe that the stock has potential to test levels of Rs240 followed by Rs245 on the upside in the medium term. One can maintain a stop loss of Rs199 on a closing basis.

STOCK RECOMMENDATIONS

ICICI BANK​................. BUY ....................CMP Rs 616.15

BSE Code : 532174
Target 1 : Rs 655
Target 2 : Rs 680
Stoploss : Rs 594(CLS)

ICICI Bank is a leading private sector bank in India and currently has a network of over 5,200 branches and more than 15,000 ATMs across India. The stock had witnessed a whopping rally of 33 per cent from its January 28 lows and it went on to touch a high of Rs679.40. It had formed a tweezers top pattern at all-time highs and with this the stock entered into a counter trend move that halted near the 38.2 per cent of the recent impulse move. Further, the important short-term moving average i.e. 20-DMA was placed near the 38.2 per cent and the stock formed a Doji pattern near 20-DMA and 38.2 per cent retracement level.

The formation of a Doji near the confluence of support indicates that the stage is set for the next leg of upward movement. The ADX on the daily timeframe is above the 25 level and the directional line +DI is above –DI. Moreover, the +DI has not gone below the 25 level and is seen hovering above the 25 level, which suggests bullish bias. Given that the stock has witnessed shallow retracement signals, a robust price structure and a higher base formation, this provides a fresh entry opportunity. We expect the stock to head towardsRs655 in the near term followed by Rs680 in the medium term. Stop loss should be maintained at Rs594 on a closing basis.

*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 Feb 23, 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.