NIFTY Index Chart Analysis

After an uninterrupted eightweek rally, the Nifty index finally faced a significant downturn, influenced heavily by global market conditions. On Friday, the index fell by 1.17 per cent, starting with a substantial gap down at the opening, and the decline persisted over the next two trading sessions. This sell-off was largely driven by fears of a US recession and concerns over the unwinding of the Yen carry trade.

As anticipated, the index closed below the 8-day Exponential Moving Average (8EMA) support, reinforcing the notion that no rally can last indefinitely without a counter-trend. Notably, this swing lasted eight weeks, aligning with the Fibonacci sequence. The Nifty ended at a one-month low, slipping below its 10-week average. Before this decline, the index had reached new highs with indecisive candle formations and reduced daily trading ranges.

Previously, we highlighted that the index was in an overstretched condition and prone to a mean reversion. When prices move too far from the mean, they typically revert to that level. The index was trading significantly above its mean,and the Bollinger Bands were expanding, indicating overextension. During the eight-week rally, the index closed above the upper Bollinger Band for six weeks, a clear sign of overextension. This impulsive move followed 18 weeks of oscillation around the 20-week average. Before this range-bound activity, the index had experienced a sharp nineweek upward movement, meeting the 100 per cent Fibonacci extension target of the previous swing.

Since 2016-2020, the Nifty has formed a 53-week rising wedge pattern. The previous rising wedge, which lasted 61 weeks, led to two bearish divergences in the monthly Relative Strength Index (RSI), culminating in the COVID-19 crash. The current rising wedge shows one bearish divergence, with several negative divergences appearing in the weekly and daily charts. As the index reacts to the rising wedge resistance line.

Our target of 25,056 was reached last week, with the next significant support at 23,620, marking a 38.2 per cent retracement level from the past eight weeks' move (21,218.45 to 25,078). Immediate resistance is at 24,450, Monday’s session high, followed by the gap area formed on August 5, 2024, between 24,350 and 24,686.85. Only sustained trading or closing above this gap will signal a pause in the downtrend.

The Monthly RSI, testing above the 80 zone, indicated extreme conditions. Historically, when the RSI exceeds 80, the market tends to correct significantly. The daily RSI has also formed a bearish divergence, and the MACD line shows a similar pattern.

During the ongoing earnings season, selecting the right stocks is crucial. We advise focusing on stocks with a projected EPS growth of at least 25 per cent. As a counter-trend consolidation is expected, invest in stocks with high relative strength. For new purchases, prioritise stocks showing improved relative strength. Vigilance is key; protecting capital and profits should be the primary focus.

The Relative Rotation Graph (RRG) charts indicate that the Nifty IT and FMCG indices are moving into the leading quadrant with enhanced relative strength and momentum. Although the Consumer Durables index remains in the leading quadrant, it is losing momentum. The Metal, Auto, and Realty indices have fallen into the weakening quadrant, losing momentum. Among all sectors, Pharma remains particularly strong.

STOCK RECOMMENDATIONS

TORRENT POWER ........................... BUY ....................... CMP ₹1,771.15
BSE Code : 532779
Target 1 .... ₹2,040 
Target 2 ..... ₹2120 
Stoploss....₹1,580 (CLS)

Torrent Power, a prominent player in the Indian power sector, is part of the Torrent Group, which focuses on healthcare and power. As a leading private sector integrated power utility in India, Torrent Power excels in power generation, transmission, distribution, and the manufacturing and supply of power cables.

The company boasts a diverse and efficient generation portfolio, including coal-based, gas-based, and renewable power plants, with a total generation capacity of 4,328 MW. The gas-based plants are particularly notable for their environmental benefits, advanced technology, and efficiency-enhancing design features.

Recently, Torrent Power scrip broke out of a consolidation pattern with record volumes, leading to a significant price increase. However, a market correction caused a pullback from higher levels, accompanied by low volumes, suggesting this pullback is merely profit booking. The stock remains above all its short and long-term moving averages, which are trending upwards and aligned in a favourable sequence, indicating a clear uptrend.

From an O'Neil methodology perspective, Torrent Power has an EPS rank of 72 (fair) and an RS rating of 88 (good), showing outperformance compared to other stocks. The buyer demand is rated B, suggesting the current pullback is an opportunity to initiate a fresh long position with a stop loss of ₹1,580 and targets of ₹2,040 and ₹2,120.

UNITED SPIRITS LTD. ........................ BUY ..................... CMP ₹1,411.20
BSE Code : 532432
Target 1 ..... ₹1,550 
Target 2 .... ₹1,610 
Stoploss....₹1,320 (CLS)

United Spirits (USL) is a leading beverage alcohol company in India, involved in the manufacturing, selling, and distribution of various alcoholic beverages, including Scotch whisky, IMFL whisky, brandy, rum, vodka, gin, and wine. The company produces and sells around 60 million cases annually, featuring brands such as McDowell's No.1, Royal Challenge, Signature, and Antiquity, as well as Diageo’s iconic brands like Johnnie Walker, VAT 69, Black & White, and Smirnoff.

On July 24, United Spirits stock broke out of a consolidation pattern with a substantial volume increase. After reaching an all-time high of ₹1,450, the stock retreated due to a market sell-off. It is now on the verge of breaking out from a trendline formed by connecting subsequent highs from the ₹1,450 level. The stock is trading above all its short and long-term moving averages, which are trending upwards in a favourable sequence, indicating a clear uptrend.

From an O'Neil methodology perspective, United Spirits has an EPS Rank of 82 (good), reflecting consistent earnings, and an RS Rating of 61 (fair), indicating recent price performance. The buyer demand is rated A-, showing strong recent demand for the stock. It is advisable to enter the stock on a breakout above ₹1,425, with targets of ₹1,550-1,610 and a stop loss of ₹1,320.

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

(Closing price as of August 06, 2024)

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.