TECHNICAL STRATEGY FOR APR 2023: VOLATILITY TO ENDURE, HOLDING MARCH LOW OF 16,800 TO FAVOUR BULLS

• The index has logged a resolute breakout from recent base formation 17,200-16,800, indicating extended pullback. We expect the index to resolve higher towards 17,600 in the coming month. Further, a decisive close above 17,600 would open the door for 18,100 in the coming quarter. In the process, bouts of volatility cannot be ruled out owing to global uncertainties. Thus, dips should be capitalised on to accumulate quality stocks.
• Key point to highlight on the oscillator front is that, since 2000, on six out of eight occasions, reading of monthly stochastic oscillators below 25 led to a durable bottom in subsequent months, leading to double digit returns in the next three months.
• We expect the index to gradually head towards 17,600 based on following evidences:

a) the breakout implication of current consolidation 17,200-16,800

b) upper band of downward slanting channel is placed at 17,600

c) 200 days EMA is placed at 17,520

Sentiment indicator approaches near maturity of bull market correction

Higher volatility, historically always led to durable bottoms

Technical Outlook

• The Bank Nifty is seen forming a base around the 52 week’s EMA (currently placed at 38,778). The index in the last four months has witnessed corrective decline after the strong up move of more than 50% in the second half of CY22. Going ahead, we expect the index to witness a technical pullback towards 41,700 as it is the confluence of the falling supply line joining the highs of the last four months and the 50% retracement of the entire corrective decline (44,151-38,613).
• Bank Nifty/Nifty ratio line continues to trend higher and sustain the above major breakout area signalling continuation of the outperformance.
• Structurally, ongoing corrective phase has already consumed 16 weeks to retrace 80% gains of preceding 10 week’s rally of October–December (37,387-44,151). A slower pace of retracement signifies corrective nature of current decline.
• The index has key major support area around 38,000-38,400. We do not expect it to be breached. Hence, dips should be used to accumulate quality banking stocks in a staggered manner.

Nifty Midcap Index : Oversold placement augurs well for pullback

• Capital Goods continues to outperform and remain in the outperformance quadrant. It has witnessed improvement in relative and momentum term. We expect capital goods stocks to remain in focus and continue to outperform.
• Banking stocks after four months healthy retracement are at key support, thus offering fresh entry opportunity with favourable risk reward set up. In our relative strength model it is also placed at Bargain Buy quadrant.
• Pharma stocks are witnessing buying demand from the oversold territory and are expected to extend the up move, thus providing favourable risk reward set up.
• Auto stocks in the last three months has corrected and are currently placed at an attractive levels, thus providing bargain buy opportunity.
• IT and metal stocks are expected to consolidate and perform at par with the overall market.

Sectoral indices – Relative to benchmarks

Relative Strength Comparative: Evaluating underlying strength

• To closely gauge the underlying strength in respective sectors vis-à-vis the benchmark, we analyse the Relative Strength Comparative (RSC) indicator. As the name suggests, it is a comparative measure of strength vis-à-vis a benchmark or a sector.
• While the RSC line is rising, the sector is outperforming the general market i.e. it is either rising faster than the benchmark in an up trending market or going down less, in a down trending market or even rising. While the RSC line is falling, the sector is underperforming the broad equity market. If the market is going up, the sector is going up less or may be even going down. If the market is going down when the RSC line is falling, the sector is going down more than the market. A flat RSC line indicates in line market performance going up or down by the same magnitude.
• The purpose of this exercise is to identify those sectors that are outperforming and avoid sectors that are underperforming.

Technical Outlook – Pharma & Chemicals 

• Pharma, healthcare and chemicals stocks continued their downtrend and resultant under performance.
• Overall price action over past four months has resulted in oversold readings on the weekly and monthly charts. Also, the index has approached its 2022 low of 20847 and expected to pose technical pull back in coming months.
• Technically, Dr Reddy, Sun Pharma, Alkem Labs, Zydus Life, Torrent Pharma and Abbott look better.

• The Consumption sector overall underperformed during March barring few stock specific action.
• Most of the stocks across FMCG and discretionary are oversold and poised for a technical pull back. In relative terms, we expect the sector to perform in tandem with benchmarks.
• Technically ITC, HUL, United Spirits, Titan, Trent, Havells, Radico Khaitan, Supreme Industries look better placed.

• The IT index underperformed as the index came under pressure post US banking crisis led to sell-off and surrendered all gains of prior month.
• While we approach result season and most stocks are over sold we expect a technical pullback followed by a base formation in the sector. Overall sector is likely to perform with markets.
• We like TCS, Infosys, LTI Mindtree, Cyient, Newgen Software from risk-reward perspective.

• Capital goods sector extended its relative outperformance amid recent volatility. Sector maintained its uptrend on multiple time frames.
• The sector’s relative ratio with the index is indicating a continued uptrend and expected to extend its relative outperformance against benchmark.
• Within space, chartically we prefer L&T, Siemens, Cummins, AIA Engineering, Thermax, Cochin Shipyard, HAL, Titagarh Wagons and KEC.

• The oil & gas space extended its decline led by heavyweights like Reliance Industries while OMCs and gas distribution companies performed relatively better.
• Going forward, relative underperformance is expected to bottom out in coming month and sector to stage technical pull back.
• Stocks like Reliance Industries provide favourable risk reward.

• The metal index extended decline in March 2023 led by Hindalco, while already run up steel companies witnessed profit booking.
• In relative terms, the index ratio with benchmark is poised at key hurdle and indicates relative underperformance with stock specific performance.
• Technically, Tata Steel, Sunflag Iron are preferred.

• The Auto Index corrected in line with benchmarks during March amid global volatility while factoring in various negatives globally and domestically.
• In relative terms, the ratio line is consolidating after breakout from multiyear base formation. We expect sector to perform in line with benchmarks and provide favourable risk-reward.
• Technically, Tata Motors, Maruti Suzuki, Mahindra CIE, Bosch, Apollo Tyres are looking good on price charts.

• The real estate index continued its relative underperformance as most of the stocks remained under correction amid rising interest rates environment. However, with expectation of interest rate cycle peaking out we expect the sector to undergo base formation and gradually see a technical pullback.
• In relative terms, the ratio is in downtrend and indicates the sector is expected to remain laggard.
• Within the infra space we like UltraTech Cement, NCC, HG Infra while DLF has been resilient.