Nifty: Bears stand a chance as the game is on, bull vs bears, tug of war, sensex, nifty, reliance, infosys, hdfc, 11000 nifty, 30 stades
India’s Coronavirus (COVID-19) tally has skyrocketed past the one million mark. But for bulls on Dalal Street, it was another week as usual. Nifty continued its range bound movement punctuated by a mid-week correction as fears rose over the new round of lockdown announced by some state governments. The bulls, however, managed to keep bears at bay, thanks to hopes of an early vaccine and better-than-expected results by IT majors, especially Infosys and Wipro. The result was a market rally in the last two days of the week, allowing the index to end in the green for the fifth consecutive week.
However, the notable point is that the pace of weekly gains in the index has slowed down to 1.2 percent, the lowest in the last five-weeks.
This is the longest stretch of weekly gains for the index since July-August 2019 when the market had gained for six consecutive weeks.
The funnel narrows
At the granular level, the index is being driven by a sector rotation and the week’s gains came largely from technology, pharmaceuticals and oil & gas companies. In contrast, banks, NBFCs, power and infrastructure witnessed selling and their sectoral indices ended in the red.
Among individual index stocks Bharat Petroleum was the biggest gainer followed by Wipro and Infosys.
The market funnel, however, narrowed sharply and only two stocks - Infosys and Reliance Industries - accounted for most of the gains during the week.
In fact, if not for a rally in Infosys, the index would have ended in the red as the week saw sell-off in three index heavyweights -- Hindustan Unilever, HDFC and ICICI Bank.
The market breadth favoured bears with 27 index stocks declining last week against 23 advances. The advance to decline ratio was favourable till last week.
Newsflow during the week
The week was dominated by the June quarter results of three IT majors – Infosys, Wipro HCL Technologies. The companies reported higher than expected profits as suspension of international flights due to COVID-19 pandemic led to a sharp decline in their travel expenses. The earnings performance by technology majors boosted the confidence on Dalal Street where most traders had resigned themselves to a washout quarter for corporate earnings, especially after a poor show by Tata Consultancy Services and Avenue Supermart in the previous week.
The broader economy however continues to feel the pain from the pandemic. The week saw a further cut in India’s growth prospects for FY21 due to localised lockdown and rising COVID-19 cases.
ICRA now expects FY21 real GDP to contract by 9.5 per cent against its earlier forecast of a 5 percent contraction.
India Ratings & Research expects GDP to contract by 5.3 percent against its previous estimates of 1.9 percent decline.
The retail inflation as measured by Consumer Price Index (CPI) rose to a discomforting level of 6.1 percent in June as disruptions in the supply chain pushed up food prices. This may force RBI to rethink the stance for any further rate cut in its August meeting.
The recent trend in the bond market suggests a bottoming out of the yields, which have declined for the sixth consecutive month now. But it has moved in a narrow band of 5.74 to 6.0 percent for the last two months and hints at a breakout to a higher level.
There is an inverse relationship between bond yield and stocks prices and any uptick in the former could lead to a market correction.
What do charts say?
Nifty50 closed above its 200-day moving average for the first time since beginning of the market in the third week of February this year. This is a positive sign and if the bulls manage to hold on 10900 levels for a few days with strong volumes then the next target for the index is 11,500.
The chart however also suggests a significant slowdown in market momentum as the index moves up. The chart below indicates that Nifty has been moving in a narrow range post its recovery from the fiscal stimulus fiasco but the channel has now narrowed down considerably and its slope has begun to flatten.
This gives the impression that the gains are now tough to come by and there is a tug of war between bulls and bears.
The market breadth has already turned bearish and declining stocks exceeded advancing stocks last week.
This is an ideal setup for a bearish trigger. Historically, corporate earnings take a turn for the worse as the earnings season progresses and there could be some nasty surprise for investors next week.
The banking index – BankNifty – that still accounts for nearly a third of the market is also showing weakness and repeatedly failed to cross 23,000 levels. On its weekly charts, the index formed a big bearish candle after a shooting star in the last week.
This makes 10,900 to 10,950 a key battle ground between bulls and bears.
The immediate support on the downside is now at around 10,550 and a close below this may lead to a sharp correction.
Going ahead, traders are advised to be stock specific with a bias towards defensive stocks in sectors such as IT, FMCG and pharma.
Index traders should stay on the sidelines and wait for the market to breakout before making bets.
(The writer, T-Rex, is not a dinosaur. He is a technical analyst from the previous century.)
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of 30 Stades.
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