Nifty50 approaching confluence of hurdle zone, profit booking seen in Bank Nifty
Appearance of an indecisive weekly candle with comparatively large upper shadow in Bank Nifty indicates profit taking at higher levels.
The mood on the street remains markedly exuberant as Nifty climbed higher (up by 1.5 percent this week) despite multiple indecisive candles and narrow trading range. Even, Wednesday’s correction proved to be short-lived. In a scenario, wherein equities are relatively outperforming other asset classes, retracement moves/pullback tends to be shallow. Though the market has consistently made headlines by climbing over walls of worries, the presence of confluence of hurdles between 10,800-10,900 could result in an uncomfortable ride from here on for market participants. (i.e. midpoint of current three-digit Gann number at 10,850, four-digit Gann number is marked at 10,890 & presence of downward gaps formed in March 2020). Three-digit Gann number of 106(00) is expected to act as a base in the near term.
Dependence on Reliance Industries to push the market forward from a tight spot has become a quite common theme these days. Ratio of Reliance/Nifty from the low of June has seen a rally of 14 percent which implies outperformance of Reliance against Nifty or return of “RILdependencia” on Dalal Street (i.e. Dependence on Reliance to lead the index forward). The ratio has also surpassed the peak of June in this week’s trade. Concerning part is that others (index constituents) are lagging. Detailed study of medium term breadth of Nifty shows a bearish divergence i.e. the benchmark index appears to be gradually moving higher, but percent of index components trading above 50-DMA is sliding lower.
We have created a customized index i.e. NiftyTop 11 index as per market cap-weighted method. This index includes 11 top weighted stocks within the index. These stocks combine to command over 60 percent weightage in the Nifty. Currently, this index is hovering just below its 200-DMA and 2/3 retracement zone. Retreat from this hurdle zone could lead to time-wise correction in the near term.
Ratio of BankNifty/Nifty yet again failed to clear the hurdle of 2.13. On a standalone chart, BankNifty was up 2.5 percent on a weekly basis; however, the appearance of an indecisive weekly candle with comparatively large upper shadow indicates profit taking at higher levels.
The Nifty Auto index corrected by over 2 percent from its peak this week. We expect it to go through sideways correction in the near term. Since March 2020 low, the Nifty Auto index has rallied by over 60 percent, in the process it engulfed the peak of the tall red bar of March. Currently it is approaching resistance of downward sloping trendline on the monthly chart, which indicates unfavorable risk-reward ratio for creating fresh longs in this index. Sideways correction after a strong upmove is likely to result in better opportunities.
[The author is Lead Technical Analyst – Institutional Equities at YES Securities.]
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First Published on Jul 12, 2020 07:58 am