Dharmesh Shah ICICI Direct.com Research
The equity benchmarks witnessed a sharp rebound on Wednesday after tumbling to their lowest weekly closing level in the last six months as relentless selling pressure across the board saw the index testing 10,200 levels earlier during the week.
We expect the index to continue with the current pullback and test last Friday’s bearish gap area around 10,600 levels in the coming sessions.
The index has seen a sharp decline of more than 13 percent in the last five weeks which has led to an extreme oversold reading around 10 on the weekly stochastic. Hence, a pullback from the oversold territory seen on Wednesday’s session was on the expected lines.
However, to confirm the conclusion of downward momentum, the Nifty needs to decisively close above Friday’s bearish gap area (10600) and also form a higher high-low for more than two consecutive sessions as it has not extended a pullback for more than two trading sessions during the current corrective phase since August 2018 high of 11760.
Time wise, since the beginning of CY18, each directional leg in the Nifty has lasted for seven to eight weeks. In the present scenario, the index has maintained the rhythm by correcting for the fifth successive week.
We expect the ongoing correction to mature in the coming 1-2 weeks around the major support area of 10,200. The volatility is likely to remain high ahead of Q2FY19 earning season and macro data like IIP, CPI, going ahead.
As both time-wise and price-wise, the index is approaching maturity so we suggest to utilise the current decline to accumulate quality stocks in a staggered manner in the coming weeks.
The index has major support around 10200 levels as it is the confluence of the following technical observation:
a) Trendline support joining the lows of September 2017 (9688) and March 2018 (9952) placed at 10250 levels
b) The 38.2% retracement of the entire rally from December 2016 to August 2018 (7894-11760) placed at 10280 levels
Here is a list of top three stocks which can give 9-12% return in the next 1-6 months:
State Bank of India: Buy| CMP: Rs 278| Target: Rs 310| Stop Loss: Rs 255| Return 12%| Time Frame 6 months
The stock has been consolidating in the broad range of Rs 330-240 in the last 11 months. The recent corrective decline in the last month from the higher band of the consolidation range has led the stock to almost test the lower band of the range, thus providing a fresh entry opportunity with a favourable risk/reward set up.
The share price of State Bank of India has seen a strong uptrend from March 2016 to October 2017 as it rallied from 149 to 351 levels. During the entire up move since March 2016, the stock has been taking support at the rising trend line currently around 255, which also coincides with the 50% retracement of the previous major up move (149 to 351), thus making it a crucial support for the short-term.
We believe the recent corrective decline has achieved maturity and is likely to resume fresh up move and test levels of 310 in the coming months as it is the trend line resistance joining previous major highs.
ITC: Buy| CMP: Rs 270| Target: Rs 298| Stop Loss: Rs 247| Return 10%| Time Frame 6 months
The share price of ITC has been trading in a primary uptrend, and within this primary uptrend, the index has undergone periodic phases of secondary consolidation.
The ongoing corrective phase has helped prices to cool off from the overbought situation. We believe the price is currently placed near its key support zone of 270 which offers a fresh entry opportunity for the next leg of the up move to unfold.
Despite the ongoing corrective phase, the prices continued to form a higher peak and trough on the weekly chart, suggesting a primary uptrend is still intact.
After recording 52-weeks high of Rs 323, prices retraced 78.6% of its upmove since Rs 252–323, placed at Rs 268 levels.
Among the momentum oscillators, the weekly RSI has seen a positive hidden divergence, wherein prices are making higher low whereas RSI has recorded lower low, indicating impending trend reversal, going ahead.
In a nutshell, we believe that the stock has cooled off from the overbought situation and is currently placed at key value area. Therefore, we expect the stock to form a higher base and gradually head towards 299 as it is 61.8% retracement of the last leg of the corrective move (323 – 267), placed at 301.
Aurobindo Pharma: Buy| CMP: Rs 780| Target: Rs 849| Stop Loss: Rs 740| Return 9%| Time Frame 1 months
The stock has seen a change of polarity as previous trendline resistance joining the major high of C.Y 2016 (895) and 2017 (809) has reversed its role and acting as support. The sharp up moves from the support area signals reversal of corrective consolidation and offers a fresh entry opportunity to ride the next up move.
The stock during the previous four weeks corrective decline has formed a base at the 50% retracement of the previous up move (602 to 827) highlighting positive bias.
Time wise the stock has already taken five weeks to retrace just 50% of the previous four weeks up move from 602 to 827. A slower retracement of the previous rally signals a robust price structure.
We expect the stock to resolve higher from here on and head towards 855 levels in the coming months as it is 123.6% external retracement of last major decline (827-699)
Disclaimer: The author is Head Technical at ICICI Direct.com Research. The views and investment tips expressed by investment expert 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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