NIFTY Index Chart Analysis

The Nifty has given clear signs of weakness since the last weekend by forming bearish patterns and closing below the key support. As mentioned earlier, the index behaviour around the crucial level of 18,000 is important to watch. The frontline index formed bearish engulfing pattern last Friday and got confirmation for its implications on Monday as the follow-up bar was a bearish one which carried lower high and lower low formation. Meanwhile, on the weekly chart, it formed a shooting star and got confirmation by opening below last week’s close. The formation of these bearish patterns is important because they formed a key resistance level with added distribution days.

The Nifty declined 525 points or 2.92 per cent in just two days. This violent move is because of overextension and exhaustion of a rally, also on expected lines. With the violent fall, it probably could be the intermediate top. The Nifty has ended its most prolonged, 14 successive higher high candles – ignore the candle of August 5 which was inside bar. Interestingly, all the previous patterns at the resistance were bearish in nature as well. Generally, the weekly bearish candles at the resistance are more significant as they are potent and reliable. The RRG relative strength and momentum are also showing underperformance. Talking about the probable targets on the downside, during earlier downswings the index retraced 50-78 per cent; initially, it will take a breather. These retracements are violent in nature. We assume that history will also repeat itself (technical analysis based on history repeats philosophy) this time. The first support is at 17,329 (23.6 per cent), 16,919 (38.2 per cent) and finally 16,587 (50 per cent). 

In the worst-case scenario, a close below 16,256 (61.8 per cent), the Nifty will test the previous swing lows of May 12 which is placed at 15,784 (78.6 per cent). We are expecting a base formation at this level by forming a higher low. If at all it turns out to be as projected, base consolidation will take for at least 8-13 weeks. This whole corrective phase will be of 13 months (since October 2021). Historically, all the major corrections were 13 months long. The 1992-93, 1997-98, 2008-09 and 2010-11 corrections continued for 13 months.

Another important factor is that whenever the index has doubled from its low, it has exhibited a tendency to correct nearly 25 per cent from the top. This has happened several times. In 2004 it corrected 35 per cent after it gained 119 per cent and in the year 2008 it corrected 64.5 per cent after a 402 per cent bull market from 2004-08. In 2011, the correction was 28.5 per cent and in 2015 it was 25 per cent. In the years 2000, 2008 and 2020 the corrections were of 58 per cent, 65 per cent and 39.56 per cent, respectively. 

Historically, the index has shown three categories of correction from its major tops: (1) 11-13 per cent, (2) 25-30 per cent and (3) 50-60 per cent. Category 1 corrections occurred in 2013, 2016 and 2018. We are already in Category 2 correction as the Nifty corrected 18 per cent. If we assume that the 25 per cent correction is a historical probability, we can expect the Nifty to correct to 13,953, which is a little over 38.6 retracements of the 2020-2021 dream rally of 147.7 per cent from the lows. Another important observation is that the equidistance channel target was met monthly in October 2021. This channel midline is precisely at the 25 per cent correction level. 

Watch the level of 17,860 and 17,992 on the upside. We expect this zone to act as a crucial resistance zone. Only above this will the index continue the rally. For now, avoid aggressive purchases and try to book profits. Apply prudent risk and money management practices to protect the capital.

STOCK RECOMMENDATIONS

LT FOODS LTD. ............................ BUY ....................... CMP ₹98.65
BSE Code : 532783
Target 1 .... ₹110 
Target 2 ..... ₹130 
Stoploss....₹89(CLS)

LT Foods is one of the leading branded Basmati rice companies. The company is in the business of milling, processing and marketing branded and non-branded Basmati rice and manufacturing rice food products for the domestic and overseas markets. Its major brands include ‘Daawat’, ‘Royal’, ‘Ecolife’, ‘Devaaya’ and ‘Kari Kari’. The company has a presence in over 60 countries with a strong footprint in the US, Europe and the Middle East. The company recently acquired a 51 per cent stake in Golden Star Trading Inc. to strengthen its market share in the US Jasmine rice segment. Technically, the stock has broken out of a 16-week double bottom pattern. For the last three weeks, the stock is registering above-average volume. Its relative price strength is as high as 81, indicating outperformance as compared to the other listed stocks. It is trading above the key moving average and is around 9 per cent above the 50 DMA and 18 per cent above the 200 DMA. All the moving averages are in an uptrend. The MACD histogram shows an increased bullish momentum. The RSI is in a bullish zone. The ADX (20.09) shows strength in the trend. The KST has given a buy signal and the RS momentum and RRG RS are above the 100 zone. It is also above the anchored VWAP. Currently, it is at the prior pivot level. A move above ₹101 is positive and it can test the previous lifetime high of ₹110 in the very short term. Maintain a stop loss at ₹89. Above ₹110, continue with a trailing stop loss for a target of ₹130. 

COAL INDIA LTD. ............................ BUY ............................ CMP ₹222.85
BSE Code : 533278
Target 1 ..... ₹238 
Target 2 .... ₹254 
Stoploss....₹203 (CLS)

Coal India Limited, a public sector ‘Maharatna’ company, is the world’s single-largest coal producer. It is one of the largest corporate employers with manpower strength of 248,550 people. The company functions through its subsidiaries in 84 mining areas spread over eight states of India. Coal India had 318 mines as of April 1, 2022 of which 141 are underground, 158 opencast, and 19 mixed mines. These contribute 85 per cent of the total domestic coal production and 75 per cent of total coal-based generation. CIL contributes 55 per cent of the total power generation. During last year, the company registered the best-ever production figure of 622.63 MT, registering growth of 4.4 per cent. Technically, the stock broke the 13 weeks’ cup and handle pattern four weeks ago. It sustained above the breakout level. On a daily chart, it has broken out of a bullish flag pattern. Its relative price strength is as high as 81, indicating outperformance as compared to the other listed stocks. The 40-week moving average acted as strong support during the recent uptrend. It has been moving in a staircase manner since April 2021. The stock also retraced almost 38.2 per cent of the last five years of downtrend. The RSI is in a strong bullish zone and the MACD histogram shows strong bullish momentum. The KST has given a fresh buy signal this week. TSI is already in the bullish setup. The RS momentum is strong at 107.5. It is trading above the anchored VWAP. The Elder impulse system has formed strong bullish bars for the last seven weeks. In short, the stock is in a strong uptrend and trading near the pivot. A move above ₹221 is positive, and it can test ₹238 in the very short term. Maintain a stop loss at ₹203. Above ₹238, continue with a trailing stop loss for a mediumterm target of ₹254.

(Closing price as of Aug. 23, 2022)

*LEGEND: • EMA - Exponential Moving Average. • MACD - Moving Average Convergence Divergence • RMI - Relative Momentum Index • ROC - Rate of Change • RSI - Relative Strength Index

Disclaimer: Above recommendations are based on various technical parameters and any fundamental input has not been considered for the recommendations. Follow strict stop loss for the recommendation.