technical strategy: healthy consolidation to set stage for next leg...

Research Analysts

Dharmesh Shah

[email protected]

Pabitro Mukherjee

[email protected]

Nitin Kunte, CMT

[email protected]

Vinayak Parmar

[email protected]

Ninad Tamhanekar, CMT

[email protected]

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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25

30

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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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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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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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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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• 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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• 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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• 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


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

[email protected]


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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

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technical strategy: healthy consolidation to set stage for next leg...

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