In 2019 calendar year to date, the Nifty 50 benchmark index barely grew by 2.3%, thanks to the 1% uptick in the last week ended August 9. The Indian stock market is not for the faint-hearted as figures show. Several factors, both domestic and international, impacted the stock markets. At the domestic level, it was 2019 Lok Sabha elections and the Union Budget. At the global front, the US Fed Reserve interest rate action weighed on the stock markets this year. The domestic consumption engine is sputtering although the monsoon has been okay and interest rates have been at the lowest in nine years. At this moment, the outlook is hazy. While fundamentally things are okay, it is often market technicals that decide the short-term picture. The study and use of price and volume charts and other technical indicators are used to make trading decisions. Poised at 11,100 levels, will the Nifty rise or will it again disappoint? Sandip Raichura, CEO Retail and Distribution, Prabhudas Lilladher believes that stocks and indices often behave in a “mean reversionary” fashion. He tells Kumar Shankar Roy that cycles can often be powerful and so a contrarian would begin to look for evidence early on before trend traders catch on. Raichura provides his take on key sectors of the stock market such as FMCG, pharma, IT, auto and banking.
The Nifty 50 recently closed below crucial support 11,200 level. What do technicals say?
It has recently taken support at critical levels. You might be wondering what happens next. Whether the 200 DMA might be taken out and we might have a surprise rally on the cards or whether currency and China-related turmoil may break our backs and we sulk our way back to 10,200 odd levels, a common assumption being made by many (when too many people are negative, isn't it the time to start buying?).
What is the contra view today?
A contrarian view at this time is fraught with danger. No trend trader would want to give an outlook unless evidence firmly begins to point to a recovery. However, this is where the excitement of being a contrarian comes in stocks and indices often behave in a “mean reversionary” fashion – meaning cyclically within a trend and these cycles can often be powerful. So a contrarian would begin to look for evidence early on before trend traders catch on. One of the simplest tools to check for mean reversion is via the Bollinger Bands (BBs). BBs are simple in their utility (By measuring an average of the past and the volatility, it gives us an idea of direction, as well as extremities and then potential reversals) and often indicate significant points of turns after long trending moves.
You have done some research using Bollinger Bands. What are BBs telling us?
What we have done is to check for the behaviour of the Nifty and the indexed movement of some critical sectors versus the Nifty – and applied BBs to the relative performance to guess potential movements ahead. Nifty has hit the bottom of the band (calculated as 2 Standard deviations away from the mean/average) and attempted a mean reversal towards the brown line (50 day average) and if it succeeds (tried a break from the 20 DMA on Friday but failed– and this is critical) – , it can rally towards 11600 levels rapidly.
The Nifty has tested the middle of its weekly band and started to take support to claw back to the top half of its band. If 11,200 is crossed in daily charts, the rallies will take Nifty to 12,200 levels which is where the top band is placed on weekly basis currently.
What are the major sector charts telling you?
We take a look below at some major sector charts relative to the Nifty and while no predictions are being given, we highlight the patterns that have begun to form in the past few days as the Nifty made some moves upwards. High beta sectors especially banking and auto are showing potential upsides while defensives like IT, FMCG, etc are beginning to look weak. This kind of combination typically points to potential bullish reversals which, combined with the Nifty potential positive moves above, could indicate a powerful mean reversionary move ahead.
So, what are FMCG charts telling investors?
The FMCG space has outperformed the Nifty considerably and is likely to start underperforming as price moves have started making cyclical mean-reversion tendencies as the chart below shows.
The metals packs have seen a sharp correction. How are metal stocks placed now?
Metals have underperformed the Nifty sharply and the mean reversion hasn't started yet. Keep watching this space. Normally one would expect retracement rallies at some stage and when that happens, there may be sharp moves, not indicated as of now.
The pharma sector used to be a defensive, but even that space has not provided shelter. What can we expect?
No major strength in the pharma charts. The interesting thing, however, is that the Bollinger Band has become narrow and normally there is an explosive move in either direction coming when this happens.
Another sector which has been in news for all wrong reasons is automobiles. Are auto stocks primed for recovery?
CNX Auto is currently in the middle of a reversal to the mean – within an overall downtrend against Nifty that started way back in 2018 January – and current levels of the CNX AUTO/NIFTY are at the 2006 levels! No clear signs yet as of now whether it will simply mean revert to a downward trend or change trend – though potential trend change is very likely as monthly relative charts have shown potential signs of strength.
Banking has been the mainstay of the market. How does their chart look? Also, can you share the outlook on IT stocks?
Banks and financials likely to take support at current levels and outperform the Nifty as retracements inside the Bollinger is being attempted. The IT sector is likely to underperform Nifty over the next few days and weeks as the charts below show as prices have started underperforming the Nifty on the CNX IT index.