Chartist Talks | Avoid FMCGs for lack of momentum, but auto to keep pacing up, says Sudeep Shah of SBI Securities

After marking a low of 18,838 on October 26, 2023, the benchmark index Nifty has witnessed a sharp upside rally of over 17 percent in just 56-trading sessions marking a fresh all-time high of 22,124 on January 16, 2024. Thereafter, the index has slid into a period of consolidation. Interestingly, during the period of consolidation, the index is forming Ascending Triangle like pattern on daily scale. Currently, the index is on verge of Triangle breakout.

Any sustainable move above the level of 22,150-22,200 zone will lead to sharp upside rally in index. In that case, the index is likely to test the level of 22,700 as per the measure rule of Ascending Triangle pattern. While, on the downside, the 20-day EMA (exponential moving average) level of 21,750 is likely to provide cushion in case of any immediate decline.

The momentum indicators and oscillators are also echo a bullish sentiment. The short-term market breadth is demonstrating resilience, with a significant 64 percent of stocks within the Nifty space trading above their 20-day EMA level, marking a notable increase from last week's 54 percent.

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Basis the chart formations and relative strength modelling, we expect Oil & Gas, Auto, PSU Bank, Pharma, IT and Defence space to continue outperforming the broader indices in the coming few weeks while FMCG sector could still act as a laggard going ahead.

Do you see the possibility of Bank Nifty filling the gap created on January 17 in the coming days and create another leg of rally?

The Bank Nifty has been strongly underperforming frontline indices since the last couple of months. The ratio chart of Bank Nifty, as compared to the Nifty, has formed a sequence of lower tops and lower bottoms since May 2023. It has formed an Island Reversal pattern on January 17, 2024 and thereafter witnessed sharp correction. However, the correction has halted near 200-day EMA level of 44,800-45,000 from where the index has taken support multiple times in the previous week.

After taking support near 200-day EMA level, the index has formed Symmetrical Triangle pattern on daily scale.

Talking about moving averages, in last three trading sessions, the index has surged above its 20, 50 and 100-day EMA. The 20 and 50-day EMA has started edging higher, which is bullish sign. Further, the daily RSI (relative strength index) has witnessed range shift from super bearish to sideways, as per RSI range shift theory.

The index is on the verge of a symmetrical triangle breakout on the daily scale. Hence, after some more consolidation between 45,700 and 46,800, any sustainable move above the 50 DMA level of 46,750-46,800 will lead to a sharp upside rally in the index. In that case, the index is likely to test the level of 48,000 in short-term.

While, on the downside, the 10-20 EMA zone of 45,800-45,700 is likely to act as immediate support for the index from a short-term perspective.

While PSU banks have witnessed strong momentum in the past few sessions, Momentum in HDFC Bank and ICICI Bank would be extremely crucial for the Bank Nifty from the current levels as both these stocks together account for more than 50 percent weightage in the Bank Nifty.

Is it the right time to bet on FMCG stocks like ITC and HUL, given the severe correction in the recent past?

In January 2024, the Nifty FMCG reached a peak of 57,966 and subsequently began forming a series of lower tops and lower bottoms on the daily scale. Moreover, it is trading below its short and medium-term moving averages, signalling a bearish trend. Over the past few weeks, it has notably underperformed compared to frontline indices.

One should recall the saying, 'the trend is your friend until it bends'. In this scenario, it's advisable to steer clear of stocks that are currently exhibiting a lack of momentum. ITC, in particular, has been experiencing significant selling pressure following the announcement that British American Tobacco (BAT) intends to reduce its stake in the company. Given that ITC and HUL together account for 52 percent of the Nifty FMCG index, their performance has been a significant factor in the index's recent underperformance.

The ratio chart of Nifty FMCG to Nifty is at its 57-week low, indicating a prolonged period of underperformance relative to the broader market. Additionally, the Mansfield Relative Strength indicator has remained below its zero line for the past 118 trading sessions, reflecting sustained weakness in relative strength.

Among the constituents of Nifty FMCG, 60 percent of stocks were observed trading below their 20-day EMA level, while 53 percent were trading below their 50-day EMA level. This discernible trend underscores a notable weakening in the internal strength of the index.

Hence, we believe, we should avoid FMCG stocks for now. Talking about levels, the zone of 54,000-54,100 will be the immediate hurdle for the index. While, on the flip side, the zone of 53,200-53,100 will be act as crucial support for the index. Any sustainable move below the level of 53,100 will lead to sharp correction in index upto its 200-day EMA level in short-term. The 200-day EMA is currently placed at 52,166 level.

Does the uptrend look sustainable in the Nifty Auto index from here on?

On Friday, the Nifty Auto took the centre stage as one of the top performers among sectoral indices. Notably, it showed a breakout above a horizontal trendline on the daily scale. What's particularly impressive is that, with the exception of MRF, all constituents within the index are demonstrating a positive bias, reflecting the sector's robust overall performance.

Additionally, the ratio chart, which compares Nifty Auto with the Nifty index, illustrates significant strength by reaching a 63-month high. Moreover, the Mansfield Relative Strength indicator has displayed remarkable consistency, remaining above the zero line for the past 214 trading sessions. This prolonged period of sustained outperformance underscores the sector's resilience and suggests the potential for further growth ahead.

Among the constituents of Nifty Auto, 71 percent of stocks are currently trading above their 20-day EMA level, while 78 percent of stocks are trading above their 50-day EMA level. This robust internal strength within the index underscores its resilience and sustained positive momentum.

Hence, we believe, the index is likely to continue its northward journey and test the level of 20,800, followed by 21,250 in short-term. While, on the flip side, 20-day EMA level of 19,408 is likely to provide the cushion in case of any immediate decline.

Follow Sudeep Shah on Twitter - @Sudeep_Shah

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