NIFTY Index Chart Analysis : HEED THE WARNING SIGNS

The market has been struggling to move higher during the last two weeks or so. While trading at lifetime highs during the month, the Nifty made an effort to close above the 15,900 level at least thrice. It wavered in the zone of 15,670-15,900 a majority of the time. Whenever it fell sharply below the 15,670 level, it bounced back into the zone. Because of this two weeks’ sideways move, the Bollinger Bands contracted to the minimum level after November 2020. This is an early indication of volatility expansion in the coming days. The historical low of a VIX is another indication that volatile days are coming. 

The tussle between bulls and bears is becoming more interesting as they have failed to dominate the market for more than two days since mid-May. These alternate bouts of up and down are clearly not showing any strong trend on a daily timeframe. But on a weekly chart the Nifty has not closed below the prior bar low for the last 10 weeks. The sharp declines during the month have been confined to a day or two. Even though several bearish patterns have failed to get confirmations in the recent past, we cannot ignore them and be complacent, especially when they form at a lifetime high.

On June 28, the Nifty opened at a new lifetime high but failed to close at a new high. The fact is that it formed a bearish engulfing or a bearish belt hold-like pattern, and interestingly, it got the confirmation on the following day. The benchmark index is hanging on the 20-DMA support for now. And a close below the 15,742-15,670 zone of support could open the doors for a quick fall. By moving 952 points during May, the market reversed the ‘sell in May and go’ adage. After such a stupendous 6.51 per cent move, it added 149 points in its kitty for the month of June based on the 29th closing.

As a result, the Bollinger Bands contracted. The 50-DMA is at 15,220 and it is about 3.47 per cent away from the current closing. There is a serious negative divergence in the weekly RSI as it formed a lower high and reacted from resistance. Even on the daily chart, divergence is clearly visible and moving in a downward channel. The momentum is very flat. The negative directional indicator –DMI is dominating as it moves above the +DMI and ADX. The daily ADX (13.92) shows the weaker trend strength. The growth engines of the market have shown signs of cooling off. 

Reliance Industries, which is up by 170 per cent from its March 2020 lows, has lost its steam and is seen trading in a range for the past nine months. Bank Nifty gained 134 per cent from March 2020 to February 2021 and currently it is 7.4 per cent away from its prior high. Institutional participation of both FIIs and DIIs is at the lowest level. As the Nifty IT, Nifty Metal and Nifty Pharma indices are at their new highs, the market is not in a mood to fall as these are emerging as the new drivers. The broader indices such as Nifty 500, Mid-Cap 100 and Small-Cap 100 also at their new highs. But they have looked tired for the past three weeks.

Despite the fact that the market did not show any significant weakness, it keeps repeating the warning signs. The price action shows that the trend strength is weak. In any case, if the Nifty fails to make a decisive move beyond the level of 16,000 and declines below 15,670, it would be a big red flag for the bulls. Furthermore, it could also hint that an intermediate probable market top is in place at the level of 15,916. A close around the levels of 15,630-15,670 would lead to the formation of a monthly spinning top-like candle. This is another clear signal of a market top.

The weekly close below 15,500 will be the first close below the prior week’s low. Watch out for the zone of 15,670-15,500 as firm support. Any break below this support zone would signal a decisive bearishness. At the same time, a move above the 15,915-16,000 level would be positive and it could test the levels of 16,100-16,240 in the near term. As we are critically poised, technically speaking, it is not the time to be complacent, especially when warning signs are emerging that volatility could rear its ugly head. Keep risk management in place and if the support level is breached, take profits off the table.

STOCK RECOMMENDATIONS

DR.REDDY'S LABORATORIES LTD. ........... BUY ............... CMP Rs 5,431.95

BSE Code : 500124
Target 1 : Rs 5,644
Target 2 :  Rs 6,000
Stoploss : Rs 5,289 (CLS)

Dr. Reddy’s Laboratories is an integrated global pharmaceutical company that operates through three core segments – pharmaceutical services and active ingredients, global generics and proprietary products. It has a diversified presence across global markets, including the US, Europe, Russia, China, Brazil, India and other emerging markets. It has also has the advantage of a wide portfolio of corona virus-related drugs, including the Sputnik vaccine as well as a 2DG drug in the domestic market. Technically, the stock is ready to break out of the 41-week double bottom (William O’ Neil’s). It was trading in a tight range for the past three weeks. The stock took support at 20-DMA and moved higher. It is comfortably trading above its 50-DMA and 9 per cent above 200-DMA. As the stock is trading near the pivot point, all the short and long-term moving averages are trending up. The daily histogram is about to give a buy signal and the weekly histogram is rising, which is a positive sign for the market. The Elders impulse system has given bullish signs. The stock has moved above the anchored VWAP. The decline in volume shows the pattern character. The RSI has broken out of a channel on the weekly chart. In short, the stock is in a long-term bullish structure. A move above Rs 5,440 is a big positive breakout for the stock and it can test Rs 5,644 in the very short term. Above Rs 5,644, it can test Rs 6,000 in the medium term and Rs 7,152 in the long term. Maintain a stop loss at Rs 5,289

LARSEN & TOUBRO INFOTECH LTD ............. BUY .............. CMP Rs 4,121

BSE Code : 540005
Target 1 : Rs 4,600
Target 2 : Rs 4,775
Stoploss : Rs 3800 (CLS)

Larsen and Toubro Infotech is a global technology consulting and digital solutions company that has a global presence. It has expanded operations in 31 countries and has a strong footprint in accelerating clients’ digital transformation with its LTI Mosaic platform enabling mobile, social, analytics, IoT and cloud journeys. Technically, the stock is forming a double bottom (William O’ Neil’s) for the past 24 weeks. Before that, it has given a whopping 270 per cent return from March 2020 to January 2021. The base has formed at a 23.6 per cent retracement level of the prior uptrend. The stock is trading above all the short and long term averages. It is trading 5 per cent above the 50-DMA and 14 per cent above the 200-DMA. The stock is trading near the pivot level. The weekly MACD is about to give a buy signal as the histogram is near the zero level. The ADX (35.96) shows a decent strength in the trend. The +DMI is above the –DMI and this is positive for the stock. The RSI is near the 60 zone and there is no negative divergence visible. Accumulate this stock between Rs 4,100-4,200 with a stop loss of Rs 3,800. The short-term target is placed at Rs 4,600 followed by Rs 4,775.

(Closing price as of June 29, 2021)
*LEGEND: n 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.