Random Ramblings: Don’t lose hope!

With strength in Oil & gas and pharma sector, the decline in Nifty has got arrested while broader index like CNX 500 is yet to confirm a bottom (though the selling pressure has stopped). Hence the composition of Nifty turns out to be better in assisting quick recovery and we feel that the stage is set for the key indices to surge higher towards 8,400.

Jun 18, 2015 09:06 IST IIFL Pritesh Mehta |

Whenever a bearish bias or weakness swings too far in one direction, market always tends to revert back. In Nifty’s case, after carnage of ~15% since the peak of March (9,119), it has broken below multiple support levels. Last week, it broke from the neckline of a bearish head & shoulders pattern following a break below its 50-WMA.
 
Appearance of ‘spring’ formation along with ‘higher top’ and ‘higher bottom’ in previous five trading sessions corroborates the uptrend. With Nifty regaining its control above the earlier support, it has led to formation of spring, implying that a fresh rally is set to begin from here on and head towards the resistance of the downward sloping trendline (8,400).
 
Nifty daily chart 

 
With strength in Oil & gas and pharma sector, the decline in Nifty has got arrested while broader index like CNX 500 is yet to confirm a bottom (though the selling pressure has stopped). Hence the composition of Nifty turns out to be better in assisting quick recovery and we feel that the stage is set for the key indices to surge higher towards 8,400.
 
Following are the stocks that may contribute prominently for the index in the current recovery process
 
Reliance: A perennial underachiever, the stock has started moving with some impressive returns in this week trade. Technically, the stock has surpassed its downward sloping trendline which is in place since May 2015. Also, a triangle breakout is seen on the short-term charts. Moreover, Reliance Industries has managed to surpass and sustain above its 200-DMA for the first time since December 2014.   We expect the stock to stage a rally towards Rs1,050.
 
Daily chart of Reliance  


 
Dr Reddy’s Labs:  Uptrending stocks tend to find support at strong support levels and provides a pullback. Dr Reddy’s Labs certainly falls in this category. It had gone through a phase of correction after making a peak of Rs3,962 in third week of May. However, it found support at its previous low which was made in early May. The same level also coincides with the support of its 200-DMA. On the short-term charts, it has given a breakout from falling wedge pattern, suggesting that the bear market is over in the stock and the uptrend is likely to resume from current levels. Such back to back confirmation on the short-term and medium term charts corroborates positive view in the counter.
 
Daily chart of Dr Reddy’s Labs 


L&T:  L&T had been on a downward trend since third first week of March 2015. However, this decline could easily be termed as correction in a bull market. In this corrective phase, the stock has found support around its 38.2% retracement of its up move since January 2014. The same also coincides with the support of its 200-DMA. After a brief period of consolidation, the stock gave a breakout from a downward sloping trendline.
 
Daily chart of L&T
 

HPCL: The stock had been in an uptrend since October 2013 as it rallied sharply from the lows of Rs186 to a peak of Rs684 in April 2015.  After this period of exuberance, the stock witnessed a typical “shakeout trade”, wherein, the stock corrected back to the support of its 200-DMA and retraced 23.6% of the entire rally. Thereafter, it created a base around Rs570 and advanced higher gradually. Eventually, it took shape of a bullish head & shoulders pattern. Generally, it is considered a major reversal pattern. However, there are occasions when an Inverted Head & Shoulders can be found as part of a continuation phase. With breakout from the above mentioned pattern, the stock could attempt Rs830 in the medium term.
 
Daily chart of HPCL 


Weakness in Dollar index and strength in INR reinstates positive stance for the index
The dollar index has retreated after hitting all time high level of 100.39 on 13th March as it failed to sustain at the top. In the process it also made double top. It is a bearish reversal pattern which led to decline in early May. We expect the downward trajectory to continue as it is trading in a downward sloping channel since last three weeks.  This move is expected to continue retrace 50%, coinciding 200-DMA. Also, a false breakout in INR, has provided strength to the Indian currency. 

The author is Senior Technical Analyst, IIFL

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