In Charts: What Technicals Are Saying About Indian Markets

The Indian equity markets rose for the second consecutive week on hopes of a swift recovery in the economy amid easing of a nationwide lockdown, positive global cues and foreign fund inflows.

The S&P BSE Sensex advanced 0.9% on Friday, while the NSE Nifty 50 rose 1.1%. Both gauges rose for the seventh day in eight to close at their highest levels in almost three months. For the week, both indices advanced about 6% each. The broader markets outperformed the benchmark indices over the past seven days as the Nifty mid-cap and small-cap indices rallied 7% and 11%, respectively. All sectoral gauges gained as well, led by financials and metal companies that rose nearly 9% each.

Analysts expect the markets to rally further. “Going ahead, a follow through strength above intermediate resistance of 10,160 (on a closing basis) would open the doors for further acceleration of upward momentum towards 10,500,” said Dharmesh Shah, head of technical analysis at brokerage ICICI Direct.

Agreed Milan Vaishnav, CMT, MSTA, who’s a technical analyst and founder of Gemstone Equity Research.

“We may once again start the week on a positive note. The trading range for the coming week is expected to remain wider just like the previous two weeks,” he told BloombergQuint. “The levels of 10,200 and 10,375 will act as strong resistance; supports are expected to come in at 10,000 and 9,810 levels.”

Vaishnav, however, advised investors to remain cautious.

“We’re in a risk-on scenario currently with liquidity chasing equities. There’s a high probability that the move above the eleven-year-long trendline resistance may be temporary,” he said. “As of now, the index trades below all its key moving averages and the present rally shouldn’t be construed as beginning of a fresh bull run until the Nifty moves above its 200-week moving average.”

With the headline indices expected to trade higher, technical analysts are focused on specific stocks and sectors going into the next week.

The relative rotation graph, used to gauge the relative strength of equities against a common benchmark and each other, suggests relative strength in select Nifty 50 stocks.

Bharti Infratel Ltd., GAIL Ltd., Bharat Petroleum Corp. and UPL Ltd. are set to relatively outperform the NSE Nifty 50.

While Bharti Infratel has moved into the leading quadrant on the relative rotation graph when benchmarked against the Nifty 50, the other three companies, currently in the improving quadrant, are also seen firmly building up on their relative momentum and moving towards the leading quadrant, according to Vaishnav.

On the other hand, select Nifty 50 stocks and consumer goods stocks can be seen to be relatively underperforming.

“The RRG charts show that Kotak Mahindra Bank Ltd. has slipped into the lagging quadrant. Also, Asian Paints Ltd., Hindustan Unilever Ltd. and Power Grid Corp. of India have moved into the weakening quadrant and appear to be losing their relative momentum when compared against the Nifty 50,” said Vaishnav.

Sectoral View

The Nifty PSU Bank Index has been the biggest underperformer this year. The gauge for PSU banks slumped more than 58% so far this year to its lowest level since November 2004. The selling pressure in state-run bank stocks may, however, abate in the short term, according to this pattern.

The Nifty PSU bank index has formed a strong bullish divergence on the weekly charts. A bullish divergence occurs when prices make lower lows, but the RSI makes a higher low. Subsequently, the index rallied more than 20% in the week—its highest weekly gain since October 2017.

“The current gain that we witnessed is the fallout of this strong bullish divergence,” Vaishnav said. “In the present technical setup, one should now stop creating aggressive shorts in the PSU banking stocks and one can look at adding select stocks from this group.”