NIFTY Index Chart Analysis

MARKETS ENTER A TRICKY ZONE

Last week’s 2.75 per cent decline turned out to be the largest in the current upswing from July 28. It was also one of the longest consecutive declines witnessed in the recent past. On Friday, it ended with Doji candle but Monday’s price action has given a reversal to the upside as it opened above the Doji candle high and closed with significant gains. The Nifty retraced 61.8 per cent of the down-move. The index closed below the 20 DMA for just one day after July 30. As the Nifty has not made a lower low, we cannot assume that the market has made a major top at 17,947.

Even though the Nifty formed a bearish candle on the weekly chart, it made a higher high and higher low candle.

Unless the Nifty forms a lower high, lower low candle on a weekly chart, we cannot assume that the current uptrend is at an endpoint. In our earlier column we had mentioned a target of 17,740, which was met without any hesitation. But when the Nifty extended 127.6 per cent of the prior swings, it reacted to the downside. The expected consolidation began and may continue for at least another two weeks. The market will not have any impact if the consolidation is in the range of 17,947 (all-time high levels) and 17,326 (swing low). A decline below the level of 17,326 would lead to a formation of lower low, which is likely to give an early sign of an intermediate top. 

The global frontline index, S and P 500, has already declined below the prior swing low and is below the 50 DMA. The Dow Jones Industrial Average index has made a lower top and lower bottom. The technologyheavy NASDAQ has drifted below the prior swing low amid technology stocks’ sell-off. As the global markets look weak, we need to watch for the level of 17,326, which will be critical for pointing out the market direction. The equity market and the Dollar index have an inverse relationship. During last week, the Dollar index (DXY) reached 94.50, which is 38.2 per cent retracement level of the prior downtrend.

In any case, expect a significant decline in the equity markets due to inverse relationship if the DXY closes above 94.50. Historically, the market has been bullish in the October-December quarter, and only once in the year 2013 did it touch a top during this period. The ongoing October- December quarter is the most optimistic for consumer demand as Diwali, India’s major festival, falls under this quarter. The market generally moves with a positive sentiment during this period. The uptrend since the low of March 2020 is now 19 months old. Historically, the downtrends are limited to either 13 months or 21 months, which are Fibonacci numbers.

Let us watch for the current uptrend also to see whether it ends on the 21st month or will continue its uptrend. This would indicate if it is really different this time around. The target for the next three months on Nifty is projected to be around the level of 18,350. The market turns bearish only in case of a decline below the level of 16,900. During last week, Mid-Cap and Small-Cap indices outperformed and this kept the market breadth positive.

Hanging man-like candle, which was formed on the weekly chart of the Mid-Cap and Small-Cap indices, failed to get a confirmation. Both indices are at a new lifetime high. The bull market ends when the Mid-Cap and Small-Cap indices reach an exuberant level. However, what we are seeing in the current run-up is that sector rotation and market-cap rotation is playing its part and as a result, there is no euphoria. On the indicators front, the RSI has turned down from the 80 zone. Historically, whenever the weekly RSI reaches the 80 zone, the market has made a top. This time too, the Nifty corrected 2.75 per cent and RSI reached a reasonable level of 73.

The Nifty made a higher low on a daily chart but the RSI has made a lower low. In any case, if the RSI moves below the zone of 55-58 along with the Nifty decline below 17,326, it would be a sign of caution. The RSI has taken support in the zone of 45-50 several times in history. Let us watch it closely from now onwards. With the above conditions, the market is in a tricky situation. Let us watch whether the Nifty continues its outperformance against the US markets or reverses its trend amid fragile global cues.

STOCK RECOMMENDATIONS

AARTI INDUSTRIES LIMITED .................. BUY .............. CMP Rs 1,021.80

BSE Code : 524208
Target 1 : Rs 1,105
Target 2 : Rs 1,328
Stoploss : Rs 945 (CLS)

Aarti Industries is a leading Indian manufacturer of speciality chemicals and pharmaceuticals. It has strong research and development facilities in four locations along with 15 plants for speciality chemicals and five plants for pharmaceutical products. Up to 83 per cent of its revenue contribution is derived from the speciality chemicals business. Technically, it has broken out of an eight-week flat base. On Monday, the volume was higher than the previous two weeks, the highest daily volume registered after March 24. As the stock consolidated for a long period, the relative price strength is fair at 56.

The stock has managed to sharply move above all the key moving averages. It is currently 10.22 per cent above the 50 DMA and 10.10 per cent above the 20 DMA. The weekly RSI has given a buy signal by closing above the prior swing high, and is in a strong bullish zone. The MACD line is about to move above the signal line. ADX (43.23) shows strong trend strength. Pring’s KST has given a fresh buy signal on the daily chart. At the end of the day, the stock closed at a new lifetime high. Buy this stock at the current market price of Rs 1,022. Maintain stop loss at Rs 945. The short-term target is placed at Rs 1,105 and the medium target is at Rs 1,328.

DIXON TECHNOLOGIES (INDIA) LIMITED ...... BUY ........ CMP Rs 4,862.40

BSE Code : 540699
Target 1 : Rs 5,310
Target 2 : Rs 5,800
Stoploss ; Rs 4,600 (CLS)

Dixon Technologies (India) is a leading electronic manufacturing services (EMS) company in India. It produces various electronic products and subsegments. The company provides design-focused solutions in consumer durables, home appliances, lighting, mobile phones and security devices to global clients. It also provides refurbishment and repair services. The stock has broken out of a ten-week flat base pattern with an above average volume. For the past two weeks the volume has been recording at a higher level. It is one of the big beneficiaries of the PLI scheme.

Further, its solid fundamental strength attracts smart money. After taking support at the 40-week average, the stock has bounced back above the prior pivot level. The key long-term moving averages are in a strong uptrend. The weekly MACD line is about to move above the signal line. The RSI has broken out of a downward channel. The stock is 15.28 per cent above the 30-week average and is in an uptrend. Buy this stock at the current market price of Rs 4,862.40. Maintain stop loss at Rs 4,600. The short-term target is placed at Rs 5,310 and the medium-term target is at Rs 5,800.

*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 Oct 04, 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.