NIFTY Index Chart Analysis

The domestic equity markets were very volatile during the last two weeks and traded in an extended range. After 18 weeks, the Nifty closed below the previous week’s low. It also closed at a three-week low. The decline with a higher volume in the last two weeks indicates clear distribution. The Nifty is holding four distribution days currently. It closed below the 20 DMA decisively. As expected, the mean reversion is now completed. But the million-dollar question is about whether the Nifty will end its counter-trend and resume its uptrend? The Nifty has declined below its July 4 low and formed an intermediate low last week.

Further, it has broken the rising channel on the downside, but it went back into the channel on Friday. This pullback is normal as long as it trades below the 20 DMA, which currently stands at 19,645. In the previous column we stated that the overstretched market would enter into consolidation as long as it trades below the lifetime high of 19,992. The pullback is limited to just one day in the previous week (July 31). It failed to break out of the flag pattern on the upside on Tuesday, though it opened above the previous day’s high. 

The next two days of sharp fall resulted in a downside breakout. For the first time since the March low, the Nifty declined by 3.48 per cent. All the prior declines were limited to less than 2 per cent. As we had forecasted, the fall is impulsive in nature. The positive aspect is that the decline is once again limited to three days and back into the downward flag pattern. All impulsive moves will enter into countertrends. As mentioned above, a close above 19,645-19,660 can be considered a failed breakdown. 

Interestingly, the broader market indices continued to outperform. The Nifty gained by 18.80 per cent from the March lows and the Mid-Cap and Small-Cap indices gained by 29.74 per cent and 35.98 per cent, respectively. Another interesting point is that the FIIs have been selling equities since July 21 and the market topped out on July 20. This coincidence has precedence. When the Nifty formed new highs in October 2021 and November 2023, the FIIs began to sell their equities. After hitting a lifetime high of 19,992 on July 20, the Nifty opened with a gap down on the next day, which acted as resistance on August 1. 

This is the reason the level of 19,650 is that of strong resistance. Only above this levelwill the Nifty gain the strength to move higher to mark new highs. The VIX is still at historically lower levels and continues to pose a threat to the trend. A small spike in VIX will lead to an impulsive move in the index, which was evident last week. With Friday’s bounce, the VIX is back to around 11 levels. As long as the VIX sustains at lower levels, the market is vulnerable to profit taking on every rise. The range of 19,340-19,650 will be of crucial support and resistance for the next fortnight. 

In any case, if the Nifty declines below the 50 DMA, which is at 19,180, with additional distribution days, it will result into changing the market status to a confirmed downtrend. Currently, we can categorise the trend as an uptrend under pressure. The weekly RSI is at 68.40 and flattened and the daily RSI is struggling at around the zone of 55. The weekly MACD histogram shows a significant decline in bullish momentum. The relative strength (RS) is poor compared to the broader market index, Nifty 500, because of the outperformance of small-cap and mid-cap stocks. 

The daily ADX shows a sharp decline in trend strength. Pharmaceutical and healthcare indices are rising in the leading quadrant as PSU Bank has just entered there and realty is falling sharply within the quadrant, indicating a correction in the realty sector. Media, metal and oil and gas sectors are rising in the improving quadrant. We advise accumulating stocks of pharmaceutical and IT companies since these two sectors may act defensive in the current conditions. Focus on money management and protect the profits on the table. Stock-specific activity will continue. It is recommended to reduce the exposure to highly volatile stocks and segments.

STOCK RECOMMENDATIONS

TOURISM FINANCE CORP. OF INDIA LTD. ........... BUY ........ CMP ₹98.85
BSE Code : 526650
Target 1 .... ₹124 
Target 2 ..... ₹136 
Stoploss....₹85 (CLS)

Tourism Finance Corporation of India Limited, popularly known as TFCI, is a leading player in providing finance and advisory services to the tourism sector. It has recently ventured into the financing of educational institutions, healthcare institutions, non-banking finance companies and real estate sectors. The company is also engaged in affordable housing development and other services such as logistics, warehousing, renewable energy and manufacturing sectors. It is instrumental in the development of over 50,000 star-category hotel rooms and other tourism attractions in India, which includes many firsts such as Taj Resorts in Kerala and Goa. The stock is trading at a high. It has broken out of a 29-week cup pattern with a high volume. For the last eight weeks the stock has been recording above average volumes, indicating buying interest. The stock has entered into Stage 2 after retesting the previous 78-week consolation. Its price relative strength is at a new high, showing outperformance. It is well-placed above the key moving averages and is trading 23.61 per cent above the 50 DMA and 26.15 per cent above the 200 DMA. The weekly MACD gave a fresh bullish signal last week and the histogram shows a strong momentum. The RSI is in a strong bullish zone. It cleared all the resistance by trading above the Ichimoku cloud. It is also above the yearly VWAP. The stock is trading 4.2 per cent above the prior pivot, which is an ideal buying zone. Overall, the stock has registered a bullish breakout and is trading in the buying range. Buy this stock in the zone of ₹95-99. Maintain a stop loss at ₹85. The short to medium-term target is at ₹124-136. 

PRAJ INDUSTRIES LTD. ....................... BUY ...................... CMP ₹469.60
BSE Code : 522205
Target 1 ..... ₹505 
Target 2 .... ₹535 
Stoploss....₹434 (CLS)

Praj Industries is a leading biotechnology and engineering company. It offers sustainable solutions for bio-energy, critical process equipment, breweries and industrial wastewater treatment. It offers innovative formulations that add economic value to biochemical processes and provides solutions to set up bio-ethanol plants based on its proprietary Enfinity-2G lignocellulosic ethanol technology. The stock has hit a new lifetime high. It has broken out of a 43-week cup pattern of a Stage 1 base. Its price relative strength is rising and near a high, showing outperformance. The Mansfield relative strength entered in the above zero line shows improved relative strength. It is trading well above the long-term averages and is 15.75 per cent above the 50 DMA and 24.07 per cent above the 200 DMA. The weekly MACD shows a strong bullish momentum. The weekly RSI is in a strong bullish zone. As the stock has traded at a new high, it has cleared all the resistance. The Elder’s system has formed a series of bullish bars. The KST and the TSI have been in a strong bullish zone. It is above the yearly VWAP. Overall, it is in the ideal buying zone. Buy this stock at above ₹461 and maintain a stop loss at ₹434. The short-term to medium-term target is ₹505-535. 

(Closing price as of August 08, 2023)

*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.