NIFTY Index Chart Analysis
The Indian stock market has been in a consolidation phase for the last six weeks. Like any other consolidation, the current one is also not giving any clear clues about the future moves as it has been consolidating at lifetime highs. The consolidation between a range of 15,431-14,467 has resulted after a sharp budget rally of 1,835 points. Interestingly, the Nifty tested the 50 per cent retracement level twice during the last one month. And it has also tested 50 DMA twice, though it had breached the 50 DMA once recently and reclaimed the important moving average in four days.
The daily chart pattern looks like a double top as it has formed two identical highs and a valley point. The valley point breached on March 19 on an intraday basis but it was able to protect it on a closing basis as Nifty recovered about 400 points from the day’s low. The recent two up and down swings are moving in a channel, which resembles a bullish flag pattern, if we consider the budget rally as a flagpole. Each of the swings is of a similar length. There are several gap openings; however, these opening gaps did not sustain. Meanwhile, both the swing highs which were recently formed were of bearish candles like an evening star on February 16 at a lifetime high and bearish engulfing on March 12.
On the bottoms, the index has formed two very big bearish candles with a 500 points range. However, recently the index bounced after formation of a big bearish bar, which has resulted in formation of a big piercing candle. Considering these wide swings which we have witnessed in recent times, trend trading in the index has become extremely difficult. With the above observations, two diverse classical technical patterns formations have emerged on the charts: one is a bearish formation (double top) and the other one is a bullish formation (bull flag), as a result of which there are puzzling signals.
Unless and until either of the pattern breakout happens when the consolidation ends, we can expect a trending move. In case the bull flag breaks out by closing above the 15,336-431 zone, the rally or an uptrend is likely to resume. In that case, the rally has the potential to rise equally to the flagpole length, i.e. 1,835 points. This means that the index may test the 17,000-plus levels in the medium term. This figure could reflect an extraordinarily exuberance, but the pattern implications say so. On the other hand, if the double top pattern breaks down, in that case expect a 38.2 or 50 per cent retracement of the March to February 2021 bull market.
Like the upside targets, the downside target is also indicating a sharp move. The level on the downside is equal to a 20 per cent correction from the lifetime. In the history of the Indian stock market, whenever the benchmark index has doubled from the bottom, it has corrected 20-25 per cent. This doubling factor may or may not repeat, but we must be cautious. It’s not the time for complacency as long as the current consolidation is continuing. On indicator front, there is nothing much of significance. The ADX (19.31) has shown not much strength in the index as it is moving sideways. The only concern is the negative movement indicator: -DMI is dominant and above the +DMI and ADX. The weekly MACD histogram entered in the bearish zone after the third week of May.
The main driving force for the Indian market has been the FII inflows. The aggressive buying which was seen in the last five months has significantly slowed down. After pumping a whopping Rs 179,104 crore in just in five months at an average of almost Rs 36,000 crore, the inflow from the FIIs in the current month has slowed down to just Rs 7,547 crore. This is because of rising bond yields and the Dollar index. These two have an inverse relationship with the Indian equity market. The Dollar index bottomed at three-year low of 89 and it is currently sustaining above the 92 levels, which indicates that a further rise is possible as it inches up with base-by-base breakouts.
Any close above 92.5 will lead to another breakout, which is negative for the Indian equity market. The US 10-year bond yield is also up by 76 per cent from the January 2021 lows. These inversely related factors are the big challenges for the equity market in the near term. Overall, the fate of the markets depends on which side of the range the markets break out. A breakout of a bullish flag would result in a continuation of uptrend, whereas double bottom breakdown which would happen if the index closes below the recent swing lows of 14,460 would open the gates for a decent correction.
STOCK RECOMMENDATIONS
SASKEN TECHNOLOGIES LTD. ................. BUY ................. CMP Rs 924.00
BSE Code : 532663
Target 1 : Rs 1,050
Target 2 : Rs 1,149
Stoploss : Rs 840 (CLS)
Sasken Technologies is a data analytics and digital technology company. The company is also involved in semiconductors and automotive infotainment solutions. The recent Q3 financial performance met the street expectation. The consolidated revenues in dollar terms grew by 4.7 per cent, and in rupee terms it registered 6.2 on QoQ. The EBIT was up by 34.5 per cent and the net profit grew by 45.6 per cent. It registered a 46 per cent growth in EPS, and it has a decent return on equity of 17 per cent. Technically, the stock is forming a Stage 1 flat base and is currently trading near to the pivot point. The relative price strength is fair at 77. During the first two trading sessions of the current week, the volumes recorded were above-average which indicates that smart money is accumulating the stock. The stock is trading above the long and short-term averages. It has almost tripled since the March 2020 lows. The current price structure suggests that the 9-weeks flat base is about to break out. The 20 period RSI is near the 70 zone and showing a strong trend. The weekly MACD is about to give a buy signal. The ADX (50.45) is showing stronger trend strength. Elders Impulse System is showing bullishness. In short, the stock is in a bullish structure. Buy this stock above the Rs 920-930 zone with a stop loss of Rs 840. The target is placed at Rs 1050 followed by the previous high of Rs 1,149.
ATUL LTD. ............................. BUY ............................. CMP Rs 7,022.95
BSE Code : 500027
Target 1 : Rs 7,500
Target 2 : Rs 8,300
Stoploss : Rs 6,600 (CLS)
A Lalbhai Group company, Atul is one of India’s oldest and largest integrated chemical manufacturers. The company has expanded its product mix and consistent integration efforts have led it to being a leading chemical player in the country. Recently it announced the buyback of shares at a maximum price of Rs 7,250. Fundamentally, the company is posting consistent double-digit earnings growth. It has a decent return on equity of 21 per cent. The company has maintained high gross margins in the recent Q3 results. The consensus estimates indicate EPS growth from Rs 216.47 to Rs 248.48 in FY2022 and Rs 289.33 for FY23. The stock has broken out of Stage 2 cup and handle pattern with an increased volume. The depth of the pattern is 18 per cent. The stock is in a perfect 45-degree uptrend for many years. As the stock is trading at lifetime highs, it is above all long and short-term averages. The weekly ADX is above the +DMI and -DMI showing a healthy trend strength. The 20 period RSI is at 65, which is a bullish sign. The weekly MACD is about to give a buy signal. The stock is also meeting the Mark Minervini’s trend template rules. Institutional participation has increased their holding by 1.86 per cent. The relative price strength (RS) is rising. Accumulate this stock above Rs 7,000 with a stop loss of Rs 6,660. The first target for the stock is placed at Rs 7,500 levels followed by medium-term target of Rs 8,300.
*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 Mar 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.