technical strategy: healthy consolidation to set stage for next leg...
TRANSCRIPT
Research Analysts
Dharmesh Shah
Pabitro Mukherjee
Nitin Kunte, CMT
Vinayak Parmar
Ninad Tamhanekar, CMT
Technical Strategy:
Healthy consolidation to set stage for next leg of up move towards 10000
June 2020
May 27, 2020
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Technical Outlook..
May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 2Source: Spider Software, ICICI Direct Research
Healthy consolidation to set stage for next leg of up move towards 10000…
NSE Nifty Weekly Bar Chart
As envisaged in the May edition of this report, index approached in the
vicinity of our earmarked target of 10000 underpinned by buoyant global
cues. Since then Nifty has undergone profit booking, aiding weekly
stochastic oscillator to cool off the overbought situation formed due to sharp
rally (~23%) seen during April 2020
We believe, the index is undergoing healthy consolidation as after a sharp
up move (~23%) seen during April 2020, Nifty has retraced 61.8% (8055-
9890), at 8800 throughout May, 2020. Slower pace of price retracement
along with equal period of time correction signifies healthy consolidation,
that has set the stage to head towards intermediate resistance of 9500. We
believe, a decisive break-out above 9500 will pave the way for further
acceleration of upward momentum towards psychological mark of 10000 in
coming months.
Empirically, most prominent observation seen post major correction (~40%)
is that, the index have undergone a basing process for next six to nine
months that have offered portfolio building opportunity from long term
prospective. Thereby, any dip from hereon should be capitalised to
accumulate quality stocks in a staggered manner
In the current scenario, as index is undergoing base formation, we believe,
any cool off from here on due to global volatility should not be construed as
negative instead it should be utilised on as an incremental buying
opportunity, as we expect intermediate correction to get anchored around
8400 levels as it is 80% retracement of entire April 2020 rally (8055-9890), at
8422.
Weekly RSI forming higher base after bouncing form lower band of falling channel, indicating
continuance of ongoing pullback
Key Support
@ 8400
12430Follow through strength above 9500 would open the doors for
further pullback option towards 10000 in coming months
Key resistance at
psychological level of
10000 being erstwhile
major support
100059952 9500
7511
Relative rotation graph projection: Cyclicals to outperform
9890
Slower pace of retracement signifies healthy
consolidation, as over past four weeks index
has retraced 61.8% of preceding four weeks
up move (8055-9890), at 8750
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1 2 4 5
-------- Technical Ranking --------
3
Returns RankingReturns Ranking
Returns Ranking RankingReturns
Bargain Buy
BFSI, Capital goods,
Oil & Gas
Outperformers
IT, Pharma, Telecom,
Agri Input
Market Performers
Auto
Neutral
Consumer Staples,
Metal, Realty
* Ranking improves from 1 to 5
Sectors Outperformers Bargain Buy
Pharma
Aurobindo Pharma, Cipla, Sanofi,
JB chemicalsLal Pathlabs, Pfier, Granules
Consumption Britannia, Tata Consumer Hind Unilever, Havells, Astral Poly
IT TCS, L&T Infotech Affle India, Mindtree
BFSI SBI Life Axis Bank, HDFC Bank, Bandhan Bank
Auto Escorts, Hero Motocorp, Maruti, Ceat
Capital goods
& Infra
L&T, Thermax, Ramco Cement
Oil & Gas Gujarat Gas, Petronet LNG BPCL, MGL
OthersTata Telecom, Coromandel Intl,
Bayer Crop, Dixon Tech
Trent, Dhanuka Agri, TCI express, Godrej
Properties, Relaxo , CONCOR
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research
Empirically, post major correction (>40%), index undergoes basing process for next six to nine months
Sensex – Quarterly Bar Chart
3
64%
57%
6-9 Months
Base Formation
56%
40%
32%
Source: Bloomberg, Spidersoftware, ICICI Direct Research
6-9 Months
Base Formation
6-9 Months
Base Formation
6-9 Months
Base Formation
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research
Nifty – Weekly Bar ChartTechnical Outlook
3
Source: Spider Software, ICICI Direct Research
o The index has undergone price-wise and
time wise retracement during May 2020,
as over past four weeks it has retraced
61.8% of preceding four weeks up move
(8055-9890). Slower pace of retracement
signifies healthy consolidation that has
helped the index to form a higher base,
setting the stage to challenge the upper
band of consolidation placed at 9500.
o Since beginning of CY-20 strong positive
correlation has been observed in
developed markets and emerging
markets. As the US market have resolved
above April highs, we expect catch up
activity to in domestic markets
o We believe, a decisive close above 9500
would lead to acceleration of upward
momentum that would help to challenge
the psychological mark of 10000 in
coming months as it is a) April 2020 high
is placed at 9890 b) 50% retracement of
entire fall (12450-7511), at 9970 c) sharp
pullback (~19%) seen during mid-March
got arrested near negative gap (10334 –
10040).
o We believe, any cool off from here on
should be capitalised on as an
incremental buying opportunity as we
expect Nifty to hold the key support
threshold of 8400 as it is 80%
retracement of entire April 2020 rally
(8055-9890), at 8422.
Nifty: Decisive close above 9500 to open doors towards psychological mark of 10000…
Weekly Stochastic is approaching oversold territory, indicating impending pullback
12430
Res@
9500
Long term
rising trend line
Breakdown
As per change of polarity concept, erstwhile
support of 10000 will now act as resistanceSup @
8400
10005
9890
Slower pace of retracement signifies
healthy consolidation, as over past
four weeks index has retraced 61.8%
of preceding four weeks up move
(8055-9890), at 8750
9952
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research
Bank Nifty – Monthly Bar ChartTechnical Outlook
2Source: Spider Software, ICICI Direct Research
o Bank Nifty is witnessing a rebound
from the crucial support area of
17000-16500 and is extremely
oversold in the momentum oscillators.
We expect the index to hold the major
support area and witness a gradual
pullback in the coming month towards
20100 levels being the swing high of
mid May’20 and 61.8% retracement of
the entire previous month decline
(21967-17105) placed at 20100 levels
o The index over the past few weeks
has been witnessing lack of faster
retracement on either side, indicating
contraction and consolidation in the
coming month
o The banking space has been one of the
key underperformer against
benchmarks during previous month.
The previous month correction has,
however, helped the momentum
oscillators to approach oversold
territory. Therefore sustainability
around the crucial support area of
17000-16500 followed by a base
formation would turn the bias
constructive for banking space
o Among the oscillators the 14-month
RSI is placed near the lower band of
the last eight years downward sloping
channel indicating a consolidation and
a pullback likely in the short term
Bank Nifty: Pullback towards 20100 expected in coming month….
32613
16116
14-month RSI placed near the lower band of the last eight years downward sloping channel
Major support @17000-16500 levels as it is:
- 80% retracement of the entire up move of
the last six weeks (16116-21967)
- Almost identical lows of the last two
months around 17100 levels
- Trendline support joining the lows of July
2009 & December 2011 is placed around
16500 levels
Res@
20100
13407
7767
3315
The index is placed near the crucial support area and is extremely
oversold so we expect it to witness a gradual pullback towards
20100 levels in the coming month
20908
6394
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Sectoral merry-go-round: Cyclicals to drive
Outlook
2
Source: Bloomberg, ICICI Direct Research
Relative Rotation Graph – Month on Month
o Healthcare stocks continue to
outperformer as the index is
currently placed in the Improving
quadrant and has seen significant
improvement in both relative and
momentum term. We expect it to
maintain its outperformance
o IT space has seen improvement in
momentum and is currently rising
from Weakening quadrant. As the IT
stocks are rebounding from strong
support area we expect it to
outperform in the coming month
o Bankex and capital goods index are
placed at Lagging quadrant.
However, the stocks are placed at
major support area and provides a
favourable risk reward set up for a
bargain buy opportunity in the
coming month
o Oil & Gas stocks has seen relative
performance and are currently in the
improving quadrant. We expect the
Oil & Gas stocks which are placed
at an attractive level to provides a
good bargain buy opportunity and
are likely to outperform
o Metals is placed at the lagging
quadrant. We expect them to
continue with there relatively
underperformance in coming month
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 7Source: Bloomberg, ICICI Direct Research
Sectoral indices – Relative to benchmarks
Relative Strength Comparative: Evaluating underlying strength
• The healthcare index extended its
outperformance through May 2020
while benchmarks consolidated
• Relative ratio with Sensex continues
to trend up and temporary breather if
any is likely to find elevated buying
demand supported by robust price
structure
• Structurally, Aurobindo Pharma, Cipla,
Sanofi, JB chemicals are expected to
outperform while Lal Pathlabs, Pfier,
Granules to provide favourable risk-
reward setup
• 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
Breakout of falling channel post
faster retracement augurs well
BSE Pharma – Monthly Chart BSE Pharma Index vs. Sensex – Relative Comparison Technical Outlook
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 8Source: Bloomberg, ICICI Direct Research
Sectoral Indices – Relative to benchmarks
• The FMCG index took a breather in
May, while holding April lows
indicating renewed buying demand
near supports.
• On relative terms, ratio spread
continues to mark rising trend which
makes us believe that index is likely
to resume its relative outperformance
in June after a subdued performance
in May
• We expect Britannia, Tata Consumer
to outperform while Hind Unilever,
Havells, Astral Poly offer favourable
risk-reward setup
• The IT index extended consolidation in
May after a shallow retracement of
April gains resulting in a higher
bottom formation and looks set for a
further up move towards 15000 levels
• On relative terms, ratio is poised for a
multi year breakout. We expect index
to continue its outperformance as
index heads for target of 15000 levels
• Amongst stocks TCS, L&T Infotech is
expected to outperform on relative
basis while Affle India, Mindtree offer
favourable reward risk setup
8496
Consolidation to extend
BSE FMCG– Monthly Chart BSE FMCG Index vs. Sensex – Relative Comparison Technical Outlook
BSE IT – Weekly Chart BSE IT vs. Sensex – Relative Comparison Technical Outlook
6782
12850
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 9Source: Bloomberg, ICICI Direct Research
Sectoral Indices – Relative to benchmarks
• Capital Goods Index went into a base
formation after bouncing from key
trend line connecting 2009 and 2014
lows, placed around 10000 levels. We
expect index to undergo base
formation around this support in
coming month
• The sector is expected to continue its
relative under performance in coming
weeks, while stock specific action is
likely
• That would provide bargain
opportunity in L&T, Thermax, Ramco
Cement
• The index is marking time after
retracing 2016-2017 rally (7987-
15628) by 80% and expected to
undergo base formation amid extreme
oversold readings
• Going forward, we expect the index to
underperform on relative terms while
stock specific action is likely to
continue.
• Gujarat Gas, Petronet LNG could
relatively do well. While, BPCL and
MGL are likely to pose technical pull
back
BSE Capital Goods – Monthly Chart BSE CG vs. Sensex – Relative Comparison BSE Capital goods Index
Under performance to continue
BSE Oil & Gas – Monthly Chart BSE Oil & Gas IndexBSE Oil & Gas vs. Sensex – Relative Comparison
7987
80% retracement
8729
15628
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 10Source: Bloomberg, ICICI Direct Research
Sectoral Indices – Relative to benchmarks
• The decline in Metal Index from its
2018 peak has achieved equality in
magnitude of fall with 2010-2013
decline, both measuring 66% from top
value
• Structurally, the metal index is
forming a lower peak-trough
formation and technical pull backs
due to oversold condition are likely to
be short lived. We expect relative
under performance to continue while
index undergoes base formation
• The Auto index has approached its key
support marked by 61.8% retracement
of 2011-2017 rally (7941-27031) and
seen marking time there
• Going ahead, we believe the index to
pose extended pull back after a
consolidation in May. Two wheeler
and tractor stocks are likely to
outperform on relative basis
• Stocks likely Escorts, Hero Motocorp,
Balkrishna Industries are likely to
outperform. Meanwhile, Maruti, Ceat
offer bargain buy opportunity
BSE Metal – Monthly Chart BSE Metal vs. Sensex– Relative Comparison Technical Outlook
BSE Auto– Monthly Chart BSE Auto Index vs. Sensex – Relative Comparison Technical Outlook
Relative underperformance to continue
7941
27031
15521
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May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 11Source: Bloomberg, ICICI Direct Research
Sectoral Indices – Relative to benchmarks
• The Realty sector index continued to form
lower high-low as it breached March-April
lows, indicating continued weakness
• We expect sector to continue its under
performance due to weak price structure
and technical pull backs if any due to
oversold prices, are likely to be short lived.
Further relative ratio of sector has given a
breakdown below multi year support levels
indicating relative underperformance for
extended period of time
• We advise to wait for stability to emerge
before venturing into bargain buying in this
space
BSE Realty – Monthly Chart BSE Realty vs. Sensex – Relative Comparison Technical Outlook
Relative under performance to continue
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Forthcoming Economic Event Calendar
May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 12Source: Bloomberg, ICICI Direct Research
Date Event Date Event
US China
1-Jun Markit US Manufacturing PMI 4-Jun Caixin China PMI Mfg
5-Jun Markit US Services PMI 5-Jun Caixin China PMI Services/Composite
5-Jun Markit US Composite PMI 11-Jun Aggregate Financing CNY
8-Jun Change in Nonfarm Payrolls 15-Jun Industrial Production YTD YoY
10-Jun FOMC Meeting 15-Jun Retail Sales YTD YoY
15-Jun Industrial Production MoM 18-Jun New Home Prices MoM
28-Jun GDP Annualized QoQ 22-Jun FX Net Settlement - Clients CNY
29-Jun PCE Deflator MoM 27-Jun Industrial Profits YoY
29-Jun Wholesale Inventories MoM 30-Jun Manufacturing PMI
29-Jun MNI Chicago PMI 30-Jun Non-manufacturing PMI
India UK
4-Jun Nikkei India PMI Mfg 1-Jun Markit UK PMI Manufacturing SA
5-Jun Markit India PMI Composite 5-Jun Markit/CIPS UK Services/Composite PMI
5-Jun Markit India PMI Services 8-Jun Bank of England Bank Rate
12-Jun CPI /Industrial Production YoY 15-Jun GDP QoQ
15-Jun Wholesale Prices YoY 22-Jun Retail Price Index
29-Jun Fiscal Deficit INR Crore 29-Jun Nationwide House PX MoM
30-Jun GDP Annual Estimate YoY 30-Jun GfK Consumer Confidence
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Guidelines to RRG Charts......
May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 13
In this section, we focus on the relative performance of the BSE sectoral indices. The adjacent scatter chart highlights the relative performance of various sectors of the BSE relative to the
Sensex with the y-axis plotting the relative price momentum and the x-axis plotting the relative price. The chart is then subdivided into four quadrants. The details of each quadrants has been
explained in the notes at the end of the report.
Leadership quadrant: Top right is “Leadership” quadrant, which represents a sector that has strengthened in relative price and momentum vis-à-vis the Sensex.
Weakening quadrant: Bottom right is the “Weakening” quadrant where the relative price of a sector has started to deteriorate and momentum has started to slow.
Lagging quadrant: Bottom left is the “Lagging” quadrant where the relative price of a sector has become negative with momentum suggesting underperformance vis-à-vis the benchmark.
Improving quadrant: Top left is the “Improving” quadrant where the relative price trend of the sector has started to rise with momentum.
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Pankaj Pandey Head – Research [email protected]
ICICI Direct Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
May 27, 2020 ICICI Securities Ltd. | Retail Equity Research 14
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We /I, Dharmesh Shah, Nitin Kunte, Ninad Tamhanekar, Pabitro Mukherjee, Vinayak Parmar Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the
subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated
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