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Last Updated : Jul 05, 2020 09:18 AM IST | Source: Moneycontrol.com

Sector churning, improving internals imply action in broader markets

Constituents recording one-month high, two-month high or quarterly high have been increasing across indices and sectors, which is fueling the recent round of rally.

Moneycontrol Contributor @moneycontrolcom

Pritesh Mehta

Sideways correction or retracement in an uptrending market always provide buying opportunities.

Last week was no different. Index struggled for a directional move at start of the week, as our customised breadth corrected lower.


However, price correction was restricted as second line of defense as per Gann rule of 8 acted as a support, resulting in a swift recovery in the benchmark index. It eventually gave a breakout above four-digit Gann number of 1041(0).

In Friday (July 3)'s trade, Nifty marked a peak of 10,631 and closed above three-digit Gann number of 106(00). In Friday's session, Nifty traded between narrow range of 69 points, it is lowest high-low daily range since January 29, 2020.

An appearance of such narrow range pattern at current juncture implies decrease in price volatility and lack of momentum on the upside. Sector rotation and improving market internals could lead to pick up in activity in broader markets.

For benchmark Nifty, dips & pullbacks should be considered as an entry point. Midpoint of three-digit gann channel placed around 10,350 could be termed as an important support for long positions.

Number of constituents recording one month high, two-month high or quarterly high has been increasing across indices and sectors which is fueling the recent round of rally. So, short-term breadth is improving, around 11 percent of Nifty 200 stocks have marked a one month high & in a three-month period 12 percent constituents of Nifty 200-DMA are trading at 60-day high (compared to naught a quarter back), suggesting improving internals.

Meanwhile, leadership sector i.e. BankNifty has not shown consistency this week. Point & figure (P&F) ratio chart of BankNifty/Nifty (0.5*3 percent) continues to consolidate within a triangle pattern. Selective strength in auto & IT stocks have proved to be major contributor in this week's index rally.

On standalone charts, BankNifty continues to dwell beneath prior month's peak of 22,480, three-digit Gann number of 225(00) has proved to be too hot to handle through the entire week. It has failed to provide a close above 22,000. Any sustenance below 22,000 could attract minor retracement towards 21,500-21,200 zone.

Nifty Auto index was among the major mover this week (up by around 4 percent) as ratio of Nifty Auto index/Nifty saw a double top buy, suggesting renewed momentum. Positive follow-up on relative chart is likely to translate into further outperformance of Auto stocks. Meanwhile, forming series of ascending tops & bottoms, Nifty IT index continues its gradual uptrend. Stock specific rally within IT space is likely to continue.

(The author is Lead Technical Analyst - Institutional Equities at YES Securities.)

Disclaimer: 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.
First Published on Jul 5, 2020 09:18 am