NIFTY Index Chart Analysis

BETWEEN A ROCK AND A HARD PLACE

The past fortnight has been particularly cruel for the global equity markets in general with Indian equities being no exception. One of the important technical developments happening on the daily Nifty charts is that it has been violating and slipping below the all-important 200 DMA level which presently stands at 16,941. On the weekly charts, even though the bar remains incomplete and may change through the week, the index is presently trading below the 50-week MA which is at 16,591. If we look from a week-onweek perspective, Nifty lost 413 points on a weekly note and as it closed on Monday, it added another 382.20 points to this negative tally. 

The most recent pattern breakdown happened when Nifty violated and broke down from the bearish descending triangle pattern. This bearish pattern had 200 DMA as its support. With this important support getting violated, it has now become a major resistance point for the Nifty going ahead from here. This being said, if we take a deeper and a larger look at the pattern analysis, the signs of weakness had started to emerge from September – November 2021. It was during this time that a bearish head and shoulder pattern had started to emerge and develop.

This was eventually violated with Nifty slipping below the level of 17,700. After achieving its price objectives near 16,400, Nifty had staged an equally remarkable rally in the form of a technical pullback. It is the geopolitical tension that is the sole external factor which has held the equity markets at ransom globally with India being no exception. If we disregard this for a moment, it is important to note that in terms of the price objectives measured through technical methods following a break from a bearish descending triangle, Nifty has largely achieved those levels.

Going ahead from here, it is obvious that the ongoing and seemingly never-ending war between Russia and Ukraine will continue to cast its negative effect on the sentiments of the markets. Apart from this, that fact that crude oil surged over 24 per cent over the previous week will also weigh heavy on the Indian markets as it is bound to inflict inflationary pressures on the economy. However, despite all this, we can also not disregard the large number of shorts that exist in the system. Even if the markets remain in the broader downtrend, a technical pullback remains imminent.

The longer the markets remain in this state, the greater will be the intensity of the technical pullback even if that does not mark any reversal and keeps the markets under a broader decline. The RSI has shown a strong bullish divergence against the price. While the Nifty made a sharp lower low, the RSI did not, and this resulted in a bullish divergence of the RSI against the price. However, for any pullback to happen, it would be crucially important for the Nifty to defend the most immediate low point of the 15,700 levels.

From the sectoral standpoint, there are possibilities that sectors like metals and oil and gas that were doing strong may consolidate and take a breather. The dollar index (DXY) which tested the levels of 99.40 on Monday is likely to cause sectors like metals to take a breather. It is also likely to put some check on gold prices as well. Shorting the markets at the current levels does not make any sense as it presents an extremely unfavourable skewed riskreward ratio. In fact, if the investors are able to pick good quality beaten-down stocks, they can expect decent returns.

This is because they are likely to pull themselves back sharply when a technical pullback happens. From this context, it would be interesting to watch automotive, IT and select financial stocks over the coming weeks. A look at the derivatives data also points at a likely possibility of the Nifty crossing and staying above the 16,000 levels. The 16,000 levels hold maximum ‘put’ OI as per the month-ending options’ expiry data. In any case, it would make little sense in shorting the markets. Investors should have more focus now on spotting good quality beaten-down names with an objective of getting decent returns over the medium term.

STOCK RECOMMENDATIONS

ASHOK LEYLAND LTD. .................... BUY ....................... CMP ₹ 99.20

BSE Code : 500477
Target 1 : ₹ 112
Target 2 : ₹ 115
Stoploss. ; ₹ 94 (CLS)

Just like other stocks in the automotive pack, Ashok Leyland has been hammered for the last few weeks as the markets remained sentimentally impacted by geopolitical issues. The stock marked its high point at ₹ 153 in November. As evident from the chart, the last phase of the up move had come with a strong bearish divergence of RSI against the price. The most recent price action says that once the stock breached the 200 DMA, the corrective move intensified further. A few signs have emerged that hint at a potential technical pullback in the stock even if the broader trend remains down. To start with, the stock has got oversold on the daily charts. The RSI has slipped below 30. This has marked a new 14-period low but it does not show any divergence against the price. The stock is presently trading below all its key daily moving averages. While the stock got oversold on the daily chart, it has tried to take support on the 200 week moving average. This 200 week MA presently stands at ₹ 98.17. Going by the derivative data, a large number of fresh shorts have also been added on this stock. The volumes have increased heavily. Large volumes at the lower and oversold levels may indicate a potential bottom and a point of reversal for the stock. If the present technical structure resolves on expected lines, a technical pullback may help the stock test the level of ₹ 112-115. Any close below ₹ 94 will negate this view.

HDFC BANK LTD . .................... BUY ....................... CMP ₹ 99.20

BSE Code : 1,323.70
Target 1 : ₹ 1,370
Target 2 : ₹ 1,400
Stoploss : ₹ 1,295 (CLS)

Just like all other banking and financial stocks, this banking blue chip has been grossly underperforming the broader markets in relative terms. The most recent price action shows that after slipping and consolidating below the 200 DMA which presently stands at ₹ 1,521, the stock showed a breakdown from an otherwise neutral symmetrical triangle formation. It also subsequently ended up violating the other support trend line as well. The most recent price action shows that the stock has made a fresh 52-week low. It is now trading well below all the three key moving averages. However, the present levels have also taken the stock inside the oversold zone. The RSI has slipped below 30. It is 28.56 and it is in the oversold area. It does not show any divergence against the price. A candle with a long lower shadow has emerged. The occurrence of such a candle especially after the decline may lead to a temporary bottom formation and a point of reversal. The increase in volumes near the low point also hints at a potential base formation for the stock. Importantly, the Nifty Bank index has rolled inside the leading quadrant on the relative rotation graph this week. HDFC Bank enjoys one of the highest weights in this index. If a technical pullback happens, the participation of this stock will be imminent for Nifty Bank to pull back. In the event of a technical pullback, the stock may test the level of ₹ 1,370–1,400 levels. A close below ₹ 1,295 will negate this view.

(Closing price as of Mar 07, 2022)

*LEGEND: • 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.