In Charts: What Technicals Are Saying About Indian Markets

“This week was marked with a strong outperformance by financials, with accommodative Reserve Bank of India’s policy measures, and further evidence of a rebound in economic activity driving optimism on asset quality front,” said S Hariharan, head (sales trading) at Emkay Global Financial Services.

India’s Monetary Policy Committee kept interest rates unchanged at its latest meeting, stressing that its objective remains to revive growth in a durable manner while maintaining inflation within the targeted range of 4 (+/-2)%. The country's gross domestic product, according to RBI Governor Shaktikanta Das, may break out of the coronavirus-induced contraction and turn positive by the fourth quarter of FY21.

That fueled the equities on the final trading day for the week ended Oct. 9, with the Sensex and the Nifty 50 gaining 4.7% and 4.4%, respectively. The broader market, however, underperformed the benchmarks. Technology stocks were the best performers, driven by better-than-expected results in the second quarter and positive outlook by Tata Consultancy Services Ltd.

“The way Nifty surpassed the Aug. 31 high of 11,794 with some authority and is now within the kissing distance of 12,000, the positivity is likely to extend further. Importantly, the banking space, which was following the benchmark in the entire recovery, finally showed some dominance on Friday. This factor is very much in favor of the bulls, providing impetus for the extended rally,” said Sameet Chavan, chief analyst (technical and derivatives) at Angel Broking. “We, however, would like to highlight that since the move is extremely swift, we can see some intraday profit-booking and hence, one needs to position accordingly and be very stock-specific.”

The Relative Rotation Graph, used to gauge relative strength of equities against a common benchmark and each other, suggests ICICI Bank Ltd., SBI Cards & Payment Services Ltd., Pidilite Industries Ltd. and Havells India Ltd. may relatively outperform the Nifty 500 index.

“Following a sharp improvement in its relative momentum, Pidilite has moved into the improving quadrant where it is joined by ICICI Bank and SBI Cards. Meanwhile, Havells has rotated positively and entered the leading quadrant,” said Milan Vaishnav, CMT, MSTA, technical analyst and founder of Gemstone Equity Research.

Bharat Petroleum Corp., SBI Life Insurance Co., GIC Re and Bajaj Holdings & Investment Ltd., on the other hand, may show relative underperformance against the broader market.

“BPCL, SBI Life and GIC Re continue to lose their relative strength against the Nifty 500 and languish further lower in the lagging quadrant. Bajaj Holdings has rotated negatively and moved directly into the lagging quadrant following a sharp drop in momentum,” Vaishnav said.

Staging A Comeback

The Nifty Financial Services Index posted its highest weekly gain since June after the gauge jumped more than 7%.

The week before, Vaishnav had told BloombergQuint that the index could be poised for a further upside after breaking out of a falling channel pattern. But according to Brijesh Bhatia, research head at Dealmoney Securities Pvt., more data and price action suggests that it could be in for a more sustained upside over the next five to six months.

“The ratio chart of financial services to Nifty in the last 10 years shows only two instances of about 20% correction (one in 2013 and other this year). The 20% fall in 2013 took nearly 38 weeks compared to 30 weeks in 2020. Going by history, the underperformance of financial stocks may have ended and there is further evidence of a reversal,” Bhatia said.

“The RSI (Relative Strength Index) indicator on the ratio chart moved below the mark of 30 for the first time since 2013. When the RSI moves below 30, it is termed as oversold zone and major bottoms are formed when it occurs. Furthermore, the ratio chart is showing a bullish momentum divergence. A bullish divergence occurs when prices make lower lows, but the RSI makes a higher low,” he said.