The month of May saw the Nifty clocking its second best month so far this calendar year. In fact, this May has recorded the second highest gain in the last six years for the month of May. It may be recalled that last May, the Nifty had soared 8% following the unprecedented electoral win by the Narendra Modi-led BJP government. Wild swings were witnessed in May as India VIX index made a high of 21.91. However amid high volatility, Nifty managed to find support at its 50-WMA and provided a sharp pullback. What it tells us is that Nifty has created a strong base around 8,200.
Weekly chart of Nifty
After breaking out from the neckline of a bullish H&S pattern in third week of May, Nifty failed to sustain at higher levels and returned to test the neckline before bouncing back. It is a classic case of old resistance turning into a support.
Nifty Intra-day chart
The old adage Sell in May seems to have been ignored largely in second half of the month as the market left behind the carnage of March & April. This month, the Nifty surged by more than 3% reclaiming control above its 200-DMA led by gains in index heavyweights like Bajaj Auto, M&M, ONGC and HCL Tech. Whether it is expectations of timely monsoon or hopes of a rate cut, the indices have managed to gather some steam off late. A move above the downward sloping trendline (above 8,550) would prove to be icing on the cake and market looks poised to see further build up after the gains of May.
BankNifty has underperformed the Nifty in the month of May but it has also honored the support of it 200-DMA as well as 50-WMA and provided a slow and steady recovery in last three weeks. It is on the verge of breaking out from a small consolidation range, which is in place since last six weeks. By Tuesday, traders will have a clear idea whether the index has the strength to sustain above 18,800 or it will fail again.
BankNifty Daily chart
Fallen angels will go back up, eventually
Since market is in a phase of recovery, it is always prudent to focus on stocks which are showing traits of a strong turnaround. Technically speaking, stocks which are bottoming out could provide significant returns. We have identified three stocks, which are worth investing at current levels because we believe in the old stock market adage that “Fallen angels will go back up, eventually.”
1 - Reliance Communications: The stock has moved on smartly after a forgettable 2014. Last year, it lost 38.5% but it has drawn a completely different chart in 2015 (especially since April 2015). In the last two months, it had been moving within a context of a triangle and on Friday it attempted a breakout from the same. A close above Rs69 next week could provide a complete turnaround story for the stock. A triangle breakout at the bottom could see the stock embarking upon a strong recovery process in 2015. First target appears to be around Rs85.
RCOM daily chart
2 - Engineers India: After almost six months of disappointment, Engineers India finally managed to break past the resistance of downward sloping trendline. A sustained rally in this stock has the potential to hit the levels of Rs230 and above.
Daily chart of Engineers India
3 – Union Bank: PSU banks have seen the worst possible time in 2015. Union Bank has lost ~28% in 2015. However, in the month of May it has seen a steady recovery. In this process, it has given a breakout from a bullish H&S pattern. As long it is able to sustain above the neckline of Rs166, the uptrend is likely to continue.
Daily chart of Union Bank
Don’t run after breakouts: Traders on the street generally believe that most of the breakouts are followed by a throwback (pullback to the breakout level) which offers an opportunity to get into the counter. However, there is one stock , which has not looked back after breaking out from a range bound phase i.e. Rupa. It has seen returns of 105% in the month of May. Such kind of a move must have certainly evaded attention even of the most avid trader.
Weekly chart of Rupa
Consolidation in uptrending stocks result in breakout
Ajantha Pharma: It is in a multi-year bull run since 2009 wherein every dip is met with buying interest. However, in the last two months, it was consolidating at the top, which finally resulted in a breakout. It tells us that whenever an uptrending counter goes through a phase of sideways correction or consolidation, it will eventually breakout on the upside. Current breakout from a small ascending triangle pattern is a healthy sign and sets a medium term target of Rs1,800 or above for this counter.
Daily chart of Ajantha Pharma
The author is Senior Technical Analyst, IIFL