In Charts: What Technicals Are Saying About Indian Markets
An image of stock price figures overlays a trader typing on a keyboard on the trading floor. (Photographer: Alex Kraus/Bloomberg)

In Charts: What Technicals Are Saying About Indian Markets

Indian equity benchmarks are expected to face a key resistance level even as the markets rebounded to end higher for the week ended Aug. 7, aided by better-than-expected earnings, foreign inflows and gains in index heavyweights like Reliance Industries Ltd.

“In a volatile week, market mood remained optimistic on improvement in active case count in India and better-than-expected operating performance in 1QFY21,” said Sanjeev Zarbade, vice president, PCG Research, Kotak Securities. “FPIs (foreign portfolio investors) bought equities worth $1.2 billion over the past five trading sessions while DIIs (domestic institutions) sold $156 million worth of equities in the same period.”

In Charts: What Technicals Are Saying About Indian Markets

The S&P BSE Sensex and the Nifty 50 index advanced 1.1% and 1.2%, respectively, for the week. The broader markets outperformed the benchmark indices as Nifty mid- and small-cap indices jumped 4.1% and 5.4%, respectively. All sectoral gauges barring information technology ended higher.

In Charts: What Technicals Are Saying About Indian Markets

“As the index came off its highs in February-end, it violated a multi-year channel (yellow dashed line). Currently, Nifty has resisted twice just below the lower trendline of that channel,” said Milan Vaishnav, CMT, MSTA, technical analyst and founder of Gemstone Equity Research. “That lower trendline acted as a support when the Nifty was above that line but is now expected to act as resistance.”

The coming week will see a tentative start with resisted upsides, he said. The levels of 11,290 and 11,350 for Nifty 50 will act as strong resistance points, while the supports will come at 11,000 and 10,910.

As headline indices are expected to trade within a narrow range, technical analysts advise stock- and sector-specific approach.

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

Infosys Ltd., Tech Mahindra Ltd., ICICI Bank Ltd. and Hindalco Industries Ltd. are set to relatively outperform the Nifty 50 index. “ICICI Bank is likely to end its underperformance as it moves into the improving quadrant. Metals are doing well, and Hindalco is expected to put a resilient show,” said Vaishnav. “Meanwhile, Infosys and Tech Mahindra could continue their relative outperformance as IT stocks rotate positively.”

In Charts: What Technicals Are Saying About Indian Markets

On the other hand, Hero MotoCorp Ltd., GAIL (India) Ltd., ITC Ltd. and Zee Entertainment Enterprises Ltd. could underperform compared to the Nifty 50 index. “Hero MotoCorp seems to have topped out and moved into the weakening quadrant as it steadily gives up on its relative momentum,” Vaishnav said. “Zee, GAIL and ITC have seen a sharp drop in momentum and have rotated back inside the weakening quadrant.”

In Charts: What Technicals Are Saying About Indian Markets

Risk-Off In Equities

The rebound in Indian markets from the March lows may be in its final leg as the Indian 10-year bond yield and risk-adjusted earnings yield suggest that the risk appetite of investors may be waning owing to the macroeconomic uncertainties, according to K Anant Rao, co-founder at Kurtosis Analytics & Advisors.

In Charts: What Technicals Are Saying About Indian Markets

“The chart of India 10-year clearly indicates a possible retest of 2003 lows in yield terms after having broken below a 17-year bullish support trendline in May 2020,” Rao told BloombergQuint. “India 10-year bond yield was at sub-5% in October 2003 and so was the size of BFSI lending books, which has over 17 years grown massively.”

In Charts: What Technicals Are Saying About Indian Markets

“To insulate from such a scenario, earnings of top 50-500 companies have to grow sufficiently enough to keep the lending / credit cycle continue unabated back to pre-Covid levels, which looks unlikely in the current setup/scenario,” he said. “The Nifty 50 earnings yield versus India 10-year bond yield ratio chart clearly indicates a return of risk-off scenario in equities as earning continue to taper.”

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