In Charts: What Technicals Are Saying About Indian Markets

“The global cues turned positive on the tech rally in the U.S. and renewed hopes for a coronavirus vaccine despite sluggish macroeconomic data. Pfizer-BioNTech Covid-19 vaccine has shown positive results and is on track for regulatory review in October,” said Siddhartha Khemka, head (retail research) at Motilal Oswal Financial Services Ltd. “On the domestic front, expectations of economic activity picking up and normalising of earnings, along with new government policies, continue to support the market.”

The BSE Sensex and the Nifty 50 gained 1.5% and 1.8%, respectively, for the week. The broader markets outperformed the benchmarks as the Nifty Midcap and Smallcap indices advanced 3.7% and 5.4%. All sectors, barring pharma, ended the week with gains.

“On the weekly chart, the Nifty has resisted to the lower trendline of the channel that it violated while starting to decline. On the shorter daily timeframe, the 11,430-11,500 zone also represents the gap that was created during the same time period,” said Milan Vaishnav, CMT, MSTA, technical analyst and founder of Gemstone Equity Research. “Amid such a technical setup, we expect the levels of 11,460 and 11,595 acting as immediate resistance points. The supports will come in at 11,280 and 11,135 levels.”

And as headline indices are expected to trade within a narrow range, technical analysts focus on sector-specific stocks going into the next week.

The Relative Rotation Graph, used to gauge relative strength of equities against a common benchmark and each other, suggests that Hindalco Industries Ltd., Tata Steel Ltd., Titan Co. and ICICI Bank Ltd. are set to relatively outperform the Nifty 50.

“Tata Steel has moved into the leading quadrant along with Hindalco and is seen moving higher while maintaining its relative momentum. Also, Titan has moved into the improving quadrant, which indicates the likely end of its relative underperformance. It is joined by ICICI Bank, which continues to rotate positively,” said Vaishnav.

On the other hand, Bajaj Auto Ltd., Indian Oil Corp., HDFC Ltd. and Hindustan Unilever Ltd. may relatively underperform the Nifty.

“Indian Oil has moved back into the lagging quadrant where it is joined by HDFC and HUL as they continue to rotate negatively, implying a sharp fall in momentum. Bajaj Auto also appears to be losing momentum and drifting lower,” Vaishnav said

Volatility In Oil Prices

Crude oil prices staged a strong comeback since bottoming out in April on the back of production cuts announced by OPEC and its allies, coupled with optimism around demand as several nations relaxed severe lockdown restrictions. The Asian benchmark had hit a five-month high of $46 per barrel earlier this month, and has been consolidating and trading in a narrow range with very low volatility.

But, according to Abhishek Chinchalkar, CMT, Head of Education at Fyers, the volatility in crude oil prices may pick up.

“Volatility in oil has reduced dramatically over the past couple of months. This is evident in Bollinger bands, which is an excellent volatility-based indicator. Notice how the upper and lower Bollinger bands have narrowed significantly, indicating a sharp contraction in volatility,” said Chinchalkar. “Historically, periods of low volatility have usually been followed by periods of high volatility. If history were to go by, then one can expect the recent 10-week consolidation to end soon and for prices to start trending again. The only question is in which direction oil prices can start trending—up or down.”

According to Chinchalkar, although the rally in oil prices has been supported by buoyant global markets and a weak dollar, it could potentially face hurdles on the way up.

“Brent oil has consistently been trading between the upper Bollinger band and its moving average (20-DMA). This indicates strength. As long as the price does not close below the lower band, the uptrend remains intact,” he said. “But a closing below the lower band would have bearish connotations. There are hurdles on the way up, which includes the 200-DMA (currently at 46.13) and a couple of key Fibonacci clusters (one at 49.02 and the other at 50.14).”

For oil prices to maintain their bullish momentum, Chinchalkar said it is imperative that world markets remain firm and the dollar remains soft. “If not, the four-month recovery in oil prices could come under pressure.”