Dharmesh Shah
The Nifty formed a strong bull candle supported by higher highs and higher lows on the weekly scale. It registered a resolute breakout above the upper band (10,930) of the last eight weeks’ consolidation range, signalling strength and positive bias in the index.
The sharp 520 points upmove in the last two weeks has sent the stochastic oscillator into overbought zone, which has led to the index trade sideways in a range of 11,078-10,930 in the last four sessions.
The current breather will help the index work off the overbought condition and form a higher base. We believe the market is undergoing a healthy consolidation, which will eventually led to a break out from current levels and challenge the all-time high of 11,172 in coming weeks.
The broader structure still remains intact. Any breather towards 10,880, being the confluence of the 38.2 percent retracement of the recent upmove (10,558-11,078) and bullish gap area of July 10, should be used as an incremental buying opportunity.
Sock specific action will remain in focus as we progress into the Q1 FY19 earning season.
Structurally, the current rally off the two week’s low (10,558 to 11,078 = 520 points) is bigger in magnitude than the early June pullback of 475 points (10,418–10,893). Time wise, the earlier pullback of 475 points took 15 sessions, while the current rally of 520 points has been seen in just 10 sessions.
The rally getting bigger and relatively faster in magnitude signals a structural turnaround that augurs well for the next leg of the upmove towards 11,172.
This overall structural improvement makes us believe that the index has strong support around 10,700 as it is a confluence of:
a) 8 percent retracement of 10,558–10,957 at 10,710
b) Rising trend line drawn adjoining 9,952-10,558 at 10,650
Structurally, the Nifty Midcap and Smallcap are placed near the support trend line of a falling wedge pattern (drawn adjoining subsequent highs of January-May and projected from subsequent lows of February-June). The daily relative strength index is showing positive divergence after last session’s panic sell-off, indicating support at lower levels, as the stochastic oscillator bounced back from oversold territory.
We believe investors should utilise this opportunity to accumulate quality stocks in a staggered manner amid the ongoing Q1 result season.
Here is a list of top three stocks that could return 10-18% in 6 months:
ITC: Buy | CMP: Rs 268 | Target: Rs 295 | Stop loss: Rs 253 | Return: 10% Time frame: 6 months
ITC in the last eleven months, has been consolidating around the earlier breakout area of Rs 250 levels. We believe that the stock has undergone a base building process that will act as a launch pad for the next leg of up move towards the higher band of consolidation (Rs 295), and provides a good entry opportunity for medium term investors.
After hitting a 52-weeks high (Rs 368) in July 2017 the stock witnessed a gradual corrective decline and found support around 250 being 80 percent retracement of the last leg of the rally (Rs 222-368) seen during December 16 to July 17.
Since then it has seen a steady base formation in a well-defined rectangle formation (as shown in adjacent chart). Currently, the stock has formed a higher high-low formation on a weekly chart for the first time in the last nine weeks, indicating termination of ongoing corrective phase.
Time-wise, the last major up move during 2016-17 (Rs 222 to 368) took eight months, whereas the index has already spent more than eleven months under current consolidation while retracing 80 percent of the gains.
Limited price wise correction and extended time wise consolidation signals the overall positive price structure. Based on the price and time wise observation, we believe that the corrective consolidation has approached maturity.
The stock is likely to maintain a positive bias and resolve higher from here on and test levels of Rs 295 being the confluence of 38.2 percent retracement of entire corrective phase (Rs 368-250) placed around Rs 295 which also coincides with the higher band of the current consolidation placed around Rs 295 levels.
Nestle India: Buy | CMP: Rs 1,0380 | Target: Rs 1,1450 | Stop loss: Rs 9730 | Return 10%| Time frame: 6 months
Nestle India has recently given a breakout above the past eight weeks consolidating a range of Rs 9,450 to 10,200. We believe the breakout from the consolidation range offers fresh entry opportunity with favorable risk/reward from a medium-term perspective.
In the entire price movement since May 2018, the share price oscillated in the sideways broader range of Rs 9,450 to 10,200, where it cooled off the overbought situation (at 89) of a stochastic oscillator formed due to earlier nine weeks rally (Rs 7566 – 9890).
A shallow price wise correction along with almost similar time-wise correction indicates a robust price structure that augurs well for next leg of up move.
Going ahead, we believe the stock has strong support base around Rs 9740, as it is a confluence of:
a) 38.2 percent retracement level of the last leg of up move (Rs 8660 -10550), placed around Rs 9800 levels
b) The 50 days EMA is placed around Rs 9720 levels
Among oscillators, the stochastic oscillator took support from 55 levels amid consolidation and now it is pointing upward, indicating an acceleration of upward momentum.
Based on the aforementioned technical observations, we expect the stock to enter into a sustainable uptrend from here on and head towards target of Rs 11450 over the medium term as it is the 123.6 percent Fibonacci extension of the April to June 2018 up move (Rs 8660 to 10060) measured from the end of June 2018 higher bottom of Rs 9500 projects upsides towards Rs 11450 levels.
Suven Life Sciences: Buy | CMP: Rs 221 | Target: Rs 260 | Stop loss: Rs 198 | Return: 18% | Time frame: 6 months
Suven Life Sciences is at the cusp of a breakout from a 28 months consolidation range of Rs 155-225 indicating a reversal of the consolidation trend and offers a fresh entry opportunity from a medium-term perspective.
The base of the last two years consolidation is placed at the major support area of around Rs 160-170 as it is the confluence of the following technical parameters:
a) the long-term rising 50 months EMA, which has acted as strong support during the entire consolidation
b) 61.8 percent retracement of the previous major up move (Rs 70-338) is placed around Rs 170 levels
The short-term support base has shifted higher to Rs 202 levels as it is the trend line support joining recent lows since March 2018 and 50 percent retracement of the recent up move (Rs 161 to 242) placed around Rs 202 levels.
Time-wise, the stock has already taken more than 28 months to retrace just 61.8 percent of the previous 13 months up move from Rs 70 to Rs 338.
The slower pace of retracement of the rally is a cornerstone of a bullish price structure and indicates the corrective nature of price decline.
Among the oscillators, the monthly MACD is sustaining in positive territory and is taking support at signal line thus validates the positive bias.
Based on the above positive structure, we expect the stock to head towards Rs 264 in the medium term as it is the 61.8 percent retracement of the entire decline (Rs 338-145).
Disclaimer: The author is Head Technical, AVP at ICICI Direct.com Research. The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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