In Charts: What Technicals Are Saying About Indian Markets

Indian equity markets rallied for the sixth consecutive week as optimism over a potential Covid-19 vaccine and a sharp surge in index heavyweights like Reliance Industries Ltd. and banking stocks boosted sentiment.

“Indian equities gained 3% in the current week, vastly outperforming their global peers,” Sanjeev Zarbade, vice-president of PCG research at Kotak Securities, told BloombergQuint. “Market mood was exuberant on progress in the development of a Covid-19 vaccine, better-than-expected Q1 FY20 results by banks and consumer stocks and hopes of another round of US fiscal stimulus.”

The S&P BSE Sensex and the Nifty 50 Index advanced 3% and 2.7%, respectively, during the week. The broader markets, too, performed in tandem with the benchmark indices as Nifty mid-cap and small-cap indices rose 1.9% and 2.8%, respectively. Most sectoral indices ended in the green, barring metals, FMCG and pharmaceuticals.

“Nifty as per weekly chart has not only surpassed its key moving averages but has also managed to hold above them over the past five trading sessions showing no signs of a major weakness,” Milan Vaishnav, CMT-MSTA, technical analyst and founder of Gemstone Equity Research. “Over the coming week, since the Nifty has been able to keep its head above the 10,900 levels, it may attempt to move higher incrementally.”

“However, despite this technical setup, we cannot ignore the overstretched nature of the markets and could see increased volatility at higher levels.” he said.

With the headline indices expected to trade within a broad range, technical analysts advise on the following stocks and sector-specific approach going into markets next week.

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.

Tech Mahindra Ltd., HDFC Bank Ltd., Wipro Ltd. and ITC Ltd. are set to relatively outperform the Nifty 50 index. “Tech Mahindra has moved into the improving quadrant and HDFC Bank too is firmly placed,” Vaishnav said. “Wipro and ITC have rotated back positively and are currently in the leading quadrant.”

On the other hand, cement and PSU stocks may relatively underperform against the Nifty. “UltraTech Cement Ltd. appears to be moving towards lagging quadrant steadily giving up on its momentum. Shree Cement Ltd. has failed in its attempt to move into the leading quadrant following a sharp drop in momentum and is likely to continue its underperformance. On the other hand, Coal India Ltd. and NTPC Ltd. continue to languish in the weakening quadrant,” he said.

Key Insight

Nickel has been one of the biggest underperformers in the last year. The metal’s price plunged close to 40% on the London Metal Exchange since October 2019 following concerns over a slowdown in China, the world’s largest consumer of the metal, surplus inventory. It was further aggravated by coronavirus-related production delays.

However, similar to equities, the base metal, used in steelmaking and batteries, has seen a sharp turnaround from its lows and technical analysts see a distinct pattern that indicates strong upside potential from current levels.

“Nickel has reversed its trend since March and has been moving in a higher high higher low formation which is a bullish indicator and also gave a breakout from its inverse head and shoulder pattern on daily charts,” said Gaurav Bissa, assistant vice president of LKP Securities. “After retesting its breakout level, the base metal has bounced sharply and can touch 14,500-15,000 levels in the coming weeks,” he said. “Strong supports are seen at 13,075 levels.”