Nifty Technical Charts And More: Time For A Breakout?

We notched up a new all-time high on the Nifty despite the index remaining largely within a range for all the five days of the week. Three of the five sessions of last week were green candles while the other two showed lower shadows, implying that buyers were to the fore throughout the week. Therefore, it is certainly curious that the index did not make for a more trended picture for the week!

Chart 1 shows the Nifty Future Daily with 'pitchfork' added. Prices are currently churning around the median line. Hence, it can be stated that the market is currently deciding on its future direction. While the new high punched out last week would certainly tilt the balance in favour of continued advances. One should remain equally alert for some adverse news at this current juncture. The width of the pitchfork is around 800 points giving us targets of 23,000 in case of advance and 22,200 (in case of declines).

(Source: CK Narayan)

The chart also shows the relative strength index indicator and we note that despite the upmove from the lows on March 20, the Nifty has not yet worked up sufficient upside momentum. Upward thrust in the weeks ahead shall definitely occur because of new momentum to the upside, while a failure to rise further may see dullness come in to the market. Hence, it is essential that the market develops fresh momentum from around here.

Given the strong performance of the mid- and small-cap space over the recent days, it should be evident that the retail investor is back in action, improving the sentiment thereby. Chart 2 shows the Weekly Nifty with a sentiment indicator, reading 'Hopeful'. This implies that the bullish moves are as yet tentative confirming the analysis that we have outlined above and defining what needs to happen in the coming days. On the ground data also reveals that there hasn’t been much participation or position builds in leading stocks in future and options as well and therefore the majority of the trading may have been of a very short-term nature, explaining the range bound action of the week just ended.

If an upward breakout now occurs there may well be a scramble to get on board the train owing to a fear of missing out or FOMO factor and this is something to watch out for as such phases can be very supportive of active trading and momentum investing.

(Source: CK Narayan)

Chart 3 is another depiction of the breadth picture, which shows a sharp increase in the short-term trends (black line), showing number of stocks with three-day-moving average greater than 18–DMA. Its also noted that 10-DMA over 50-DMA (green line) is also rising and hence the positive breadth in the market is on the ascent.

Bank Nifty has been doing reasonably well for the past three weeks and is now seen challenging the all-time highs. In our earlier letter, we had written “..the last Kumo shadow is at 48,340 and this is the target price that needs to be exceeded for strength to be established by the Bank Nifty in the week ahead" and the same has now occurred during the last week. This now sets up acceleration possibilities in the Bank Nifty which could be very helpful for the Nifty to forge ahead as well. In that context a look at Chart 4 (Private Bank versus PSU Banks) reveals the likelihood of a rally emerging in the Private Banks, which is mandatory for the Bank Nifty to accelerate. As can be seen in the chart the ratio plot has now reached a support trendline, formed a second higher bottom and shown a green candle reversal on Friday at the trendline.

Real estate and infrastructure stocks are good contributors to positive sentiment in the market. The Nifty Realty index Chart 5 shown below hit a new high last week and we find that almost all the stocks from the sector fared very well during the last week. We can expect bullish sentiment to continue to spill over into the coming weeks as well. Godrej Properties, Indiabulls Real Estate and Oberoi Realty were some stellar names that could be in play in the week ahead.

Playing spoilsport to expectation of a rally or a breakout could be the trended rise in Crude oil prices. Chart 6 shows Brent Crude with pitchfork annotation and it is noted that there is room for the prices to rise till $95-96 area before it meets the next resistance. If that were to happen rallies in global market may take a pause. This is one of the metrics to be tracked in the coming week.

Summing up, sentiment favours continuation of the upmove launched from March 20 low. A new all-time high, strong showing in the mid-cap and small-cap stocks, good performances from sentiment influencing sectors such as metal and real estate along with improvement in the banks and financial, may all contribute to further gains in the Nifty for a possible progress towards 23,000. Declines if any may curtail around 22,200 and should still be used as a buying opportunity. We look towards banks and financials to provide the acceleration input while continued patronage of the small-cap and mid-cap stocks should keep the sentiment meter ticking. Active participation in the market is suggested and return of momentum investing should be a happy auguring for traders.