NIFTY Index Chart Analysis : WAIT AND WATCH

The equity markets are becoming increasingly nervous about their moves. The benchmark Nifty50 index has been trading trading in a less than 300 points’ range for the past seven weeks. Last week, the Nifty made a decisive lower low and lower high candle and since then it has been hovering around 20 DMA. The consolidation is already 29 days old. For the second time, the Nifty has breached a trend line support drawn in the consolidation zone. It is also sustaining below the rising trend lines drawn from April 22 on a daily chart and below another rising trend line drawn from March 2020 on a weekly chart. 

The 50 DMA is about 0.6 per cent away from the current levels. There is serious negative divergence in RSI on weekly and even on the daily charts. The ADX is at just 8.82, which indicates there is no trend strength. Now the question is how long this consolidation will go on? During March-May this year, the consolidation continued for 38 days. During that period, the consolidation was a broad one with almost a 1,000 points’ range. Moreover, the consolidation also oscillated around 20 DMA.

Interestingly, once the consolidation was cleared, which resulted into breakout on the upside, the Nifty rallied for almost the same length of 1,000 points in just 28 days. This consolidation is already 29 days old. We can assume that this consolidation is at the maturing stage. The lower end of the consolidation is exactly at 50 DMA at 15,621. The parallels support is at 15,635. In the past, the Nifty has broken this parallel support line almost three times, but it managed to defend it on a closing basis.

Going forward, a close below this level would be the first sign of the market making an intermediate top. The Nifty has extended 172 per cent of the 2020 sharp fall. The 161.8 per cent retracement level was at 15,470. The prior pivot point was at 15,431. In any case, if the Nifty breaches the 15,635 support the next level of support is at 15,470-15,431. A decisive close below this level would be a clear trend reversal signal. On the other side, the broader indices outperformance also looks exhausting. The Nifty 500, Mid-Cap 100 and Small-Cap 100 indices have been consolidating for the last three weeks.

At the same time, the most defensive sector, Nifty Pharma, fell sharply by over 4 per cent on Tuesday. During this consolidation, any decisive leadership from the sector has been missing and sporadic stock-specific activity has kept the market alive and buzzing. The index heavyweights which were once the driving force, such as Reliance Industries, are seen moving sideways for the past nine months. The institutional participation is at the lowest in recent history and shows that a smart wave is not coming into the market. Currently, there have been three distribution days in the last 45 days.

An added distribution day and a decline below the 50 DMA would result into changing the market structure to an uptrend under pressure. The rally from the March 2020 low is in a well-defined trend-following rule. Every rise has had corrective counter-trend consolidations. All the minor corrections are limited to less than 50 per cent retracements and some of them are in the form of flags. And the corrections were limited to 4-5 weeks. During the March to May period of eight weeks’ consolidation, the Nifty has formed an inverted head and shoulder pattern and it has met over 70 per cent of its target. The current base is a perfect rectangle in a very narrow range. As the index is moving in a narrow range, the internal price structure is also not giving any clue.

Let us wait for a definitive trending move to take an appropriate decision. There are many reasons to be neutral on the market. In sideways or consolidation market conditions, it is extremely difficult to make trend trading decisions. An uptick in VIX would be the first sign of caution for the market. The most important level to watch out for would be the level of 15,431. The price behaviour at this support would be the deciding factor for the fate of the markets in the near term.

STOCK RECOMMENDATIONS

HIL LTD. ............BUY ........... CMP Rs 5,354.00

BSE Code : 509675
Target 1 : Rs 5,800
Target 2 : Rs 6,100
Stoploss : Rs 4,760 (CLS)

HIL Ltd. is a flagship company of the USD 2.4 billion C K Birla Group. The company has been offering comprehensive building materials and solutions for over 70 years. It has achieved market leadership with five major brands and 21 manufacturing units in India along with two units in Germany and Austria. It has a presence across five continents. Technically, the stock has broken out of an eight-week cup pattern with an above-average volume. Its relative price strength (RS) is as high as 83 and this shows outperformance to the broader market. The stock is trading 5 per cent above the 10-week average and 17.92 per cent above the 20 DMA. All the key moving averages are trending upside.

The weekly RSI has been sustaining in the overbought condition for the past many weeks. The MACD line is much above the zero line and the histogram shows an increased bullish momentum. As the stock closed at a new high, it is above its anchored VWAP resistance. The Elders impulse system has given a buy signal on the weekly chart. The stock is meeting the CANSLIM and VCP parameters. In short, the stock is at a new high with strong price strength. It can be accumulated between Rs 5,170-5,400. Maintain a stop loss at Rs 4,760. The short-term target is at Rs 5,800 followed by Rs 6,100. Above this level continue with a trailing stop loss at cost.

BASF INDIA LTD. ........... BUY .......... CMP Rs 2,815.75

BSE Code : 500042
Target 1 : Rs 3,180
Target 2 : Rs 3,270
Stoploss : Rs 2,720 (CLS)

BASF India is engaged in the manufacturing and marketing of styropor, tanning agents, leather chemicals and auxiliaries, crop protection chemicals, textile chemicals, dispersions and speciality chemicals, plastics, automotive and coil coatings, catalysts, construction chemicals, polystyrene and polyurethane systems. This multinational company has manufacturing units at Thane, Mangalore and Dadra.

Technically, the stock has broken out of a five-week flat base. Its price relative strength (RS) is fair at 64 and at a new swing high. As the stock is trading at a new high, it is above all the key moving averages, and every moving average is trending up. It is 42 per cent above the 200 DMA. The weekly MACD line is above the signal line and much above the zero line. The ADX (52.08) also shows very solid trend strength. The RSI is in a bullish zone. The stock is above the anchored VWAP resistance. The Elders impulse system has given a fresh buy signal. In a nutshell, the stock is in a very strong bullish trend. Accumulate this stock between Rs 2,800-2900. Maintain a stop loss at Rs 2,720. The short-term target is at Rs 3,180 followed by Rs 3,270.

*LEGEND:  EMA - Exponential Moving Average.  MACD - Moving Average Convergence Divergence  RMI - Relative Momentum Index n ROC - Rate of Change  RSI - Relative Strength Index
(Closing price as of July 27, 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.