Technical Analysis
WHAT LIES AHEAD : NEAR-TERM PICTURE
SPOT NIFTY :
Indian stock market registered biggest fall in a quarter. The fall is sharper than earlier bear markets. Last week’s bear market rally fizzled out in a very short period. The recovery hopes were vanished with the current week’s move. Nifty traded between 8,678- 8,198 range for the last three trading sessions.
On the hopes of stimulus packages, the market witnessed a hope rally last week in a confirmed bear market. On the most positive day (RBI’s bold monetary policy), the market gave up the gains and ended on a dull note. This was a perfect example of ‘buy on rumours and sell on news’. It also proved that bear market rallies are surging tides and ended with a collapse. Even after 20 per cent surge from the bottom in just four days, it failed to close above the retracement of 23.6. After opening gap down on Monday, it closed near the day’s low. On Tuesday, it opened with a gap up and closed near to the day’s high. On a weekly expiry day, it has breached Monday’s low on an intraday basis. But the structure of the market once again turned negative. Now 7,511-9,039 has become a critical range. As long as these levels are protected, the market will consolidate with a higher volatility. In any case, if Nifty closes below 8,198, there are higher chances of testing prior low of 7,511. Downfall will start below 8,198 with renewed energy and fall like a fireball since it is an end of the consolidation. We have already entered in to category-3 bear phase by falling more than 34 per cent. We can expect that the correction will be at least 50 per cent from its top. So, the level of 50 per cent is at 6,215. Interestingly, the 61.8 per cent retracement of 2008-2020 bull market is at 6,140. Before reaching this level, the market may take rest near 6,825.
The government has already declared the maximum level of stimulus packages to mitigate the crisis. So, do not expect any good news nearby. We cannot expect earnings push in near future. Earnings season may be delayed as the government asked to postpone board meetings. Delayed or deteriorated earnings cannot help the market to move up. Even after 40 per cent correction, Nifty PE is at 19.38 level, which is still near the overvalue zone. There is no clarity on future at the current juncture. When uncertain times are looming, it is a foolish effort to find the bottom.
NIFTY DERIVATIVES:
Nifty Futures lost 370.3 points or 4.29 per cent since the last weekly expiry. Higher rollovers were seen at 10.53 on the first week of April derivative series. The open interest rose by 6.59 per cent. It indicates that there is a short build-up in the market. As there is more call writing happening, the put call call ratio (PCR) for the next week is at 0.71. But for April monthly series, the PCR is at 1.16. For the monthly series, the highest put open interest is seen at 7,000 and 7,500 strikes is indicating that the traders are betting on market to test prior lows. For the next week, highest call open interest is visible at 9,000 strike, followed by 8,500. All the out of the money (OTM) options have a higher open interest. The 8,000 strike was seen with the highest open interest, followed by 7,500 strike. The total call open interest is at 63,28,125 and the total put open interest is at 45,11,100. From 8,100 to 8,400 strikes, the highest call writing was witnessed. On the put side, 8,100-8,250 strikes witnessed a short build-up and 8,300 strike put long liquidation is seen. But 8,350 and 8,400 put strike witnessed a short covering. This option data is showing that the traders are applying neutral to volatile strategies like straddles and strangles. India VIX is cooled off from 70.38 to 60.05 in the last three trading sessions. The current option data suggests that the next weekly expiry Max Pain is at 8,300.
Bollinger Band Squeeze is reflection of a phase where volatility contracts. Currently, we are witnessing absurd volatility in the market. So, there is no output at this point of time.
TECHNICAL RECOMMENDATION- STOCK STRATEGY
DR.REDDY'S LABORATORIES LTD BUY CMP Rs 3100.00
BSE Code ...... 500124 Target 1 ....Rs 3270 Target 2 .... Rs 3320 Stoploss.... Rs 2960
✓Current Observation: Dr Reddy’s is outperforming the sectoral and benchmark indices in this bearish market condition. The company launched Thyroid medicine into the market this week.
✓ Technically, the stock has recovered 25 per cent from the low of March 19. Interestingly, before that, it fell 26 per cent from the top of February 20. Currently, the stock is trading above all the medium and longterm moving averages. It is holding the 50-DMA support for now. It’s trading near to the prior pivot and most of the indicators are suggesting a positive momentum in the stock. The MACD line is above the signal line and very near to the zero line. The RSI is above the 50 level and near to prior swing high. The directional movement indicator suggests an explosive move as ADX, +DI and -DI are now at influx point.
✓ The stock is meeting many of the CANSLIM characteristics. The relative price strength is at 91 and the EPS strength is at 76 level. The greater buyers’ demand indicates the institutional investors' interest in the stock. The institutional investor increased their stake in the company by 0.23 per cent in the last quarter along with 5.53 per cent increase in number of funds invested in this stock. The return on equity is at 10 per cent. The stock is also trading at nine per cent above the prior pivot.
✓ Buy this stock at Rs 3,100 with a stop-loss of Rs 2,960. The targets are open to Rs 3,270 to Rs 3,320 in the short to medium-term.
REVIEW OF STOCK STRATEGY
We had recommended our readers to buy the stock of GSK Consumer Healthcare Ltd at Rs 9,700.65 in issue no. 23 (dated March 30, 2020). Post our recommendation, the stock moved higher in-line with our expectation and went on to touch the level of around Rs 10,020. We had given a ‘book profit’ message at the level of Rs 9,998.35 through our SMS service on March 31, 2020. Thus, investors who had taken positions, according to this strategy, would have made decent profit.