In Charts: What Technicals Are Saying About Indian Markets

“Indian equity markets continued their upward momentum on the back of positive global cues,” said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd. “Global sentiments continue to be buoyant led by more positive economic data from the U.S. and China, which bolstered hopes of a global economic rebound. Regulatory approval to Cadila Healthcare Ltd.’s Zydus for human trials of a potential Covid-19 vaccine, too, boosted domestic sentiment,” he said, adding a record spike in domestic coronavirus cases capped gains.

The S&P BSE Sensex and the NSE Nifty 50 Index advanced 2.4% and 2.2%, respectively, in the last week. That compares with a mixed performance by the broader markets, with the Nifty Midcap 100 index ending with marginal gains of 0.4% and Nifty Smallcap 100 index ending flat. Most sectoral indices underperformed the benchmark indices in the past week barring automobile index, which rose nearly 3.6%, and FMCG stocks gained nearly 2.6%.

“On the short-term daily charts, the Nifty is at a confluence of two resistance points and showing signs of diminishing momentum,” Milan Vaishnav, chartered market technician-MSTA, technical analyst and founder of Gemstone Equity Research, told BloombergQuint. “However, the liquidity driven markets make downsides extremely resilient.”

In the present technical setup, we strongly recommend avoiding any major exposure and adopt a stock-specific approach, Vaishnav said.

Nagaraj Shetti, technical research analyst at HDFC Securities, agreed. “Nifty is currently nearing a key overhead resistance around 10,650-700 levels,” he said. “Hence, minor profit booking from the highs is likely. A sustainable move only above 10,700 could open up next upside targets of 11,000-11,200 in the next couple of weeks.”

With the headline indices expected to trade within a broad range, technical analysts remain focused on specific stocks and sectors going into the next week.

The Relative Rotation Graph, used to gauge relative strength of equities against a common benchmark and each other, suggests relative strength in automobiles and select Nifty 50 stocks.

Larsen & Toubro Ltd., JSW Steel Ltd., Mahindra & Mahindra Ltd. and Hero MotoCorp Ltd. are set to relatively outperform the Nifty 50 index, according to Vaishnav. “L&T and JSW Steel are currently placed in the improving quadrant,” he said. “But going forward it’s expected that they will continue to move higher while maintaining their relative momentum and move into the leading quadrant along with M&M and Hero MotoCorp.”

On the other hand, Tata Consultancy Services Ltd., Infosys Ltd., Sun Pharmaceutical Industries Ltd. and Hindustan Unilever Ltd. can be seen relatively underperforming. “All four stocks have slipped in the weakening quadrant and appear to be heading lower while giving up on its relative momentum against the Nifty,” he said.

Sectoral Insight

The Nifty Auto Index has gained more than 55% from its lows in March on the back of better than expected recovery in demand. However, the sharp upmove triggered by index heavyweights Maruti Suzuki India Ltd., Mahindra & Mahindra and Bajaj Auto Ltd., which together account for over 50% of the index weight, could face resistance at higher levels, according to Tom Bruni, chartered market technician, All Star Charts.

“Right now, two of the three of them are stuck below major levels of resistance. Bajaj Auto is above 2,500 already, but Maruti Suzuki is stuck below 6,600 and Mahindra & Mahindra is stuck below 580. It’s going to be very difficult for the index to make further upward progress if its two largest components cannot break above these levels” said Tom Bruni, CMT, All Star Charts.

The analysis of the equal weighted Nifty auto index further strengthens the case for caution. “The relative performance of the equal weighted version of Nifty Auto Index versus the traditional market-cap weighted Nifty Auto shows that after making new all-time lows in March it has yet to recover,” Bruni said. “This downtrend suggests that breadth within the sector is weak, meaning that the average component of the Nifty Auto Index is faring much worse than its largest components.”

He, however, clarified that they’re not turning bearish on the sector but merely suggesting a pause in the short term. “The Nifty Auto Index is approaching resistance near 7,000 on an absolute basis, suggesting a pause in the short-term is likely,” Bruni said. “The catalyst for further gains would be a breakout above resistance in the sector’s two largest components, Maruti Suzuki and Mahindra & Mahindra.”