In Charts: What Technicals Are Saying About India Market
A data graph tracks the movement of stocks on the stock exchange in Germany. (Photographer: Alex Kraus/Bloomberg)

In Charts: What Technicals Are Saying About India Market

India’s equities posted their worst drop since September for the week ended Oct. 30, tracking their global peers, as uncertainties ahead of the U.S. presidential elections and mounting coronavirus cases in Europe weighed on investor sentiment in a volatile session.

“Global as well as domestic markets were caught on the back foot on news of stringent lockdowns in Germany and France due to rising Covid cases and uncertainty due to the U.S. elections,” said Nirali Shah, senior research analyst at Samco Securities. “Sentiments took a U-turn mid-week and markets turned from neutral to negative. All eyes are on the coming week as elections draw closer.”

The Sensex and Nifty 50 declined 2.6% and 2.4%, respectively, for the week. The broader markets, too, performed in tandem with the benchmarks with the Nifty Midcap and Smallcap indices dropping 1.4% and 2.9%. All sectoral indices posted loss during the week.

In Charts: What Technicals Are Saying About India Market

Also read: Inconclusive Election Poses ‘Terrifying Risk,’ Say Wall Street Analysts

“The weekly price action formed a bear candle carrying lower high-low and closed below previous week’s low after one month’s 11% rally (10,790-12,025), indicating profit-booking ahead of key global event of the U.S. presidential election,” Dharmesh Shah, head (technical) at ICICI Direct, told BloombergQuint. “Historically, volatility has remained elevated during the U.S. presidential election. During such a volatile phase, we expect the Nifty to find strong support around 11,000-11,200 range, which should be held post the U.S. election. Meanwhile, 11,800 would act as immediate resistance as it is 61.8% retracement of current decline (12,025-11,535) at 11,835.”

In Charts: What Technicals Are Saying About India Market

The Relative Rotation Graph, used to gauge relative strength of equities against a common benchmark and each other, suggested Dr. Reddy’s Laboratories Ltd., Infosys Ltd., Avenue Supermarts Ltd., and Indraprastha Gas Ltd. could relatively outperform the Nifty 500 index.

“Dr. Reddy’s and Infosys have taken a U-turn and entered the leading quadrant directly from the weakening quadrant. D-Mart (owned by Avenue Supermarts) and IGL have rotated positively and moved into the improving quadrant, indicating a likely end of the relative under-performance,” Milan Vaishnav, CMT, MSTA, technical analyst and founder of Gemstone Equity Research, told BloombergQuint.

In Charts: What Technicals Are Saying About India Market

On the other hand, Bajaj Finserv Ltd., Bosch, Larsen & Toubro Ltd. and NHPC Ltd. may underperform the broader market.

“Bajaj Finserv and NHPC have rotated back inside the lagging quadrant following a sharp decline in its relative momentum. Bosch has slipped further lower and continues to languish in the lagging quadrant, while L&T is about to slip in the lagging quadrant having rotated negatively,” Vaishnav said.

In Charts: What Technicals Are Saying About India Market

Key Insight

The Nifty Bank Index, which gauges the performance of banking stocks, is largely skewed in favour of large private sector lenders. The top four constituents of the 12-member index — HDFC Bank Ltd., ICICI Bank Ltd., Kotak Mahindra Bank Ltd. and Axis Bank Ltd. — account for more than 79% weight. Private banks have been among the biggest wealth creators in the last decade, while PSU peers lave lagged.

Still, PSU banks, according to Vaishnav, have always maintained a positive correlation with the Nifty Bank in a decade, barring one instance in 2017-end when it turned negative for a brief time. This is the second instance in the decade where the correlation of PSU Bank with Bank Nifty has turned negative, he said.

In Charts: What Technicals Are Saying About India Market

“What this means is that we are likely to see a diverging trend between the two indices. For instance, if Nifty Bank is seen performing poorly, we could see PSU banks performing better and vice versa. Until this gets positively correlated, we will continue to see this divergence,” Vaishnav said.

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