In Charts: What Technicals Are Saying About Indian Markets

“We expect the markets to remain volatile as investors would track global cues and development around geopolitical tensions,” said Siddhartha Khemka, head, retail research, Motilal Oswal Financial Services Ltd. “We would advise investors to look for buying opportunities on declines in market and focus more on stock-specific action.”

In the week ended June 19, the benchmarks ended higher, aided by resuming economic activity, easing border tension with China and buying in Reliance Industries Ltd. as it’s on track to turn debt-free. The S&P BSE Sensex and the Nifty 50 Index rose 2.8% and 2.7%, respectively. The broader markets, too, performed in tandem. All major sectoral indices closed higher, led by Nifty media, public sector banks and realty. Nifty FMCG, however, fell 1.5%.

The Nifty 50 may find resistance at 200-week moving average over the coming days if the current uptick continues and short-term traders have little choice but to keep following the trend, said Milan Vaishnav, CMT, MSTA, technical analyst and founder of Gemstone Equity Research. “Given the present technical setup, chasing such wild moves on the higher side is making the risk-reward ratio less favourable.”

Vaishnav said techincals suggest Nifty 50 is expected to see the levels of 10,368 and 10,435 acting as overhead resistance and the support comes at 10,135 and 9,960. “Just like the previous week, the trading range will continue to remain wider-than-usual this time as well.”

The Relative Rotation Graph, a measure of relative strength against a common benchmark and each other, suggests Zee Entertainment Enterprises Ltd., UPL Ltd. and Maruti Suzuki India Ltd. could outperform the Nifty 50 index.

All the four stocks are currently in the improving quadrant on the relative rotation graph when benchmarked against the Nifty 50, said Vaishnav. They are expected to maintain their relative momentum and move into the leading quadrant, he said.

PowerGrid Corp., Nestle India Ltd., Dr. Reddy’s Laboratories Ltd. and Asian Paints Ltd. are expected to underperform. They have slipped into the weakening quadrant and appear to be headed lower, giving up relative momentum against the benchmark, Vaishnav said.

Global Cues

Technicals, however, suggest caution on global cues given the correlation between markets. The charts show formation of an ‘island reversal’ pattern for indices around the world including the U.S., Canada, Sweden, Russia, Israel, Brazil, New Zealand and Lithuania.

It’s a formation on technical charts when two gaps isolate a cluster of trading days, implying a change of trend. This time, it’s giving a bearish signal. After a sharp gap up, prices consolidate in a range for a period before supply exceeds demand and prices gap down, trapping all longs that entered at higher levels. This creates a sharp down move as the longs rush for the exit and the shorts start adding to their positions.

“The S&P 500 chart is seen putting in its own island reversal after failing at resistance near 3,240. For now, it’s series of higher lows and higher highs remains intact, so it would take a move below 2,940 (red dotted line) to signal the start of something more meaningful,” said Tom Bruni, CMT, All Star Charts.

Bruni said he is not turning bearish on equities just yet. “The weight of the evidence is still bullish over the intermediate term, but we want to acknowledge the potential impact this pattern could have on stocks in the short term,” he said. “If these resistance levels are broken to the upside, it will be clear that bulls are still in control and further gains are likely.”

“Either way, this is something we need to monitor very closely,” he said. “India has been a laggard so if the rest of the world’s equity markets are struggling, then it’s unlikely India can continue to move higher on its own.”