Metals will continue to hog the limelight on falling USD index; Bank Nifty can extend fall

Pritesh Mehta

Months of June & July saw Nifty taking a momentous leap forward, as it staged a strong recovery and currently is trading close to the peak of March 2020. In fact action of last two months have foreshadowed the roller-coaster ride, index had witnessed since early 2020 as pandemic concerns & global economic worries weighed heavily on Indian markets.

However, after a big rally, markets invariably come face-to-face with the resistance at some juncture. The last few sessions have confirmed this truism. Index is now grappling with multiple hurdle zone i.e. 78.6 percent retracement of the entire fall from February to March 2020 low, presence of multiple Gann numbers (midpoint of current three-digit Gann channel is placed at 11,350) and inability of BankNifty to participate in the rally. Headline index on weekly basis shows a decline of 1 percent.

However, things could have been worse for Nifty, if IT & Pharma indices had not stood out with gains, which helped limit any possible downside on the index. Index' recent shortcomings have confirmed an immediate resistance near midpoint of current Gann channel (i.e. 11,350).

Pritesh Mehta

Lead Technical Analyst - Institutional Equities|YES Securities

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In this week's trade, pause wasseen from recent outperformers and profit taking among the index biggies which has chiefly contributed to recent quandary. Negative follow-up to this week's cut could drag Nifty lower till 10,850 zone in near term.

Despite a rally from 9,500 to over 11,000 levels, Nifty is underperforming amongst the other MSCI emerging market indices; largely due to underperformance of BankNifty & Financials. Even in this week's trade, BankNifty and Nifty Financial services indices lost over 4 percent in comparison to 1 percent fall in Nifty.

Inability to sustain at the top and failure of BankNifty to contribute indicates that participants are using rallies to ease their positions. Point & figure (P&F) ratio chart of BankNifty/Nifty shows a weakening trend as bull trap pattern is followed with a double bottom sell and formation of an anchor column, inferring continuation of underperformance of BankNifty against the benchmark index. On standalone P&F chart (0.25*3) of BankNifty, it has given a bearish triangle breakdown and also confirmed a double bottom sell, indicating a downside target of 20,700.

Nifty Pharma was among the major movers in this week's trade. It has surpassed the peak which was formed earlier this month. P&F ratio chart of Nifty Pharma/Nifty has seen a bear trap reversal and an anchor column, implying further outperformance of pharma stocks.

Ratio has held on to its point of polarity zone and this week's action confirms that earlier outperformers have found support on declines and made a strong comeback. We expect positive trend to continue in pharma stocks.

Nifty Metal index also emerged victorious in this week's trade. It is trading above its half-yearly mean after staging a breakout above the downward sloping trendline. Short-term ratio chart of Nifty Metal/Nifty index has also given a breakout from descending trendline, which implies that metals will continue to hog the limelight. Declining trend in US Dollar index is also likely to keep recent upward trajectory intact in metal stocks.

This week clearly saw action returning to the first movers of March - April 2020 (i.e. Nifty Pharma Index). Strength is seen in the pockets/stocks which were the first outperformers & trend setters. Meanwhile, stocks/sectors which have not participated are acting as laggards despite index hitting 11,000 mark.

The author is Lead Technical Analyst - Institutional Equities at YES Securities.