ChartTalk: Sector Poised for Gains | Stocks to Monitor Closely

ChartTalk: Sector Poised for Gains | Stocks to Monitor Closely

by | May 26, 2024 | ChartTalk

The Oil and Gas space has remained particularly strong not only over the past twelve months but also on a YTD basis. This group, represented by the Nifty Oil and Gas Index, has surged 58.98% over the past one year. The broad market index Nifty 500, during the same time period, gained 38.11%. This relative outperformance has also been carried forward on a YTD basis. When inspected on a Year-to-Date note, the Nifty Oil and Gas space has relatively outperformed by gaining 25.27% against the Nifty 500 gaining 10.35% over the same period.

This sector is significantly influenced by a complex interplay of macroeconomic factors, geopolitical tensions, and domestic policies. In recent years, the sector’s volatility has increased markedly, reflecting the rapid changes and disruptions on the global stage.

The ongoing geopolitical tensions between Russia and Ukraine, which have persisted for over two years, have led to market adjustments that have gradually been priced in. However, the recent Israel-Hamas conflict, which erupted six months ago, has also caused a sudden spike in oil and gas prices, illustrating how new conflicts can quickly impact the sector.

This heightened volatility is evident in the performance of the Nifty Oil & Gas index. In mid-October, the index was at 7500 levels. As geopolitical tensions escalated, particularly with the intensification of the Israel-Hamas conflict, a significant trend change occurred. By the end of October last year, the index had surpassed both the 50-week and 100-week moving averages, signalling a major shift in trend.

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A look at the daily chart presents an optimistic picture. The sector is showing strong improvement in its Relative Momentum against the broader markets and is set to roll inside the improving quadrant of the Relative Rotation Graph (RRG) when benchmarked against the broader Nifty 500 Index.

Technically speaking, looking at the weekly charts, it appears that the Nifty Oil & Gas index was at Rs. 7500 levels in the middle of October. As the geopolitical tensions began and the Israel-Hamas war intensified, this index saw a change in trend. On a weekly chart, it can be observed that by the end of October last year, the index crossed above the 50-week and 100-week MAs, confirming the change in trend. In December last year, the index price broke out from its previous high as well as from the long consolidation at 8650 levels which triggered a steep upmove for the next couple of months. After gaining nearly 38% and forming a high of 12000 in February this year, the index took a breather.

Since then, Nifty Oil & gas has been moving in a range of 10800-12000 levels. Last week, the index made a strong closing for the week. It has seen an all-time high on a weekly closing basis. Along with achieving a strong closing, it is very close to its recent highs of 12,000. A breakout from this resistance level can trigger the continuation of further upmove.

Technical indicators support this bullish outlook. The Relative Strength Index (RSI) is entering the overbought zone, indicating further potential for upward movement.
Additionally, the price is well-positioned in the upper band of the Bollinger Bands, highlighting the likelihood of continued momentum.

In conclusion, the oil and gas sector’s performance is heavily influenced by global geopolitical dynamics and domestic policies. The recent fluctuations in the Nifty Oil & Gas index underscore the sector’s sensitivity to external shocks and the importance of technical analysis in identifying potential trends. As the sector navigates these challenges, it presents both risks and opportunities for investors.

Which Stocks Should I be Looking At?

The Nifty Oil and Gas Index is formed by a total of 15 constituents which has RELIANCE, ONGC, IOC, BPCL, and GAIL as its top 5 constituents. However, a closer look reveals that just RELIANCE and ONGC combined make 48.31% of the Index.

A weekly close above the 12000 mark could open up fresh buying opportunities in specific stocks within the sector. As mentioned above, for any Index to have a sustainable move on the upside, the participation of at least a third of its constituents including the top 5 becomes imperative. Investors holding stocks in this sector might continue to see gains, with a long-term target of 13300 levels.

– Foram Chheda, CMT

OptionsTalk: Understanding Call Spreads

OptionsTalk: Understanding Call Spreads

by | May 5, 2024 | General

In the volatile realm of the stock market, where trends can swiftly change course, employing the right options strategy is paramount to capitalize on upward movements effectively. While some strategies like strangles may have their merits in certain market conditions, they often prove inadequate during strongly trending markets.

Let’s delve into why strangles may fall short in such scenarios and explore an alternative approach that aligns better with riding the bullish wave: Call Spreads.

Short Strangles, a popular options strategy, involve selling both a call option and a put option with the same expiration date but different strike prices. The goal is to profit from significant price movements, regardless of their direction. However, during strongly trending markets, where prices consistently move in one direction, the limited profit potential and the risk of losses from one side of the trade become evident.

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Call Spreads

To overcome the limitations of strangles in trending markets, traders often turn to call spreads, a strategy that offers a more focused approach to capturing upward movements. Call spreads involve buying a call option while simultaneously selling another call option with a higher strike price, both with the same expiration date. This creates a capped risk and a capped reward scenario, making it ideal for bullish forecasts in trending markets.

Illustration:

Let’s illustrate the concept with an example using fictional stock XYZ, currently trading at INR 100. Suppose an investor believes XYZ will continue its upward trajectory over the next month and decides to implement a call spread strategy. This can be done as under:

BUY XYZ  call option with a strike price of INR 105 for a premium of INR 3 and simultaneously sell one XYZ call option with a strike price of INR 110 for a premium of INR 1. By doing so, they create a call spread with a net debit of INR 2 (INR 3 – INR 1)

Here’s how the payoff diagram of this call spread strategy would look like:

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By utilizing a bull call spread, the investor can benefit from the bullish trend of XYZ while limiting their downside risk. Unlike strangles, which may suffer from diminishing returns in strongly trending markets, call spreads offer a more focused and controlled approach to leverage the upward momentum.

In conclusion, when navigating through a bullish market characterized by strong trends, it’s essential to choose options strategies that complement the prevailing market conditions. While strangles may offer versatility in certain scenarios, call spreads emerge as a preferred choice for capitalizing on upward movements with defined risk and reward parameters. By understanding the nuances of different options strategies and their suitability to market conditions, traders can enhance their chances of success and maximize their gains in a trending stock market.

Foram Chheda, CMT

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ChartTalk: This PSU Banking Major Shows A Promising Technical Set-up

ChartTalk: This PSU Banking Major Shows A Promising Technical Set-up

by | Apr 29, 2024 | ChartTalk

The Indian equities have had a great run over the past year. Among the sectoral landscape, the PSU banking space showcased a strong performance along with other sectors. If we look at a rolling 12-month performance, the Nifty PSU Bank Index has strongly outperformed the NIFTY by gaining 81.42% over NIFTY’s returns of 25.15%.

Most of the PSU Banks have had a great run even on a YTD basis. Among others, this PSU Banking major has shown a strong breakout from a continuation pattern and is set to move higher from its current levels.

Let us turn to examining relative performance on a Year-to-Date (YTD) basis. State Bank of India (SBIN) has returned a decent 24.94% of returns on a YTD basis and has performed in line with the PSU Bank Index which has returned 28.19%. Both the PSU Bank Index and SBIN have relatively outperformed the NIFTY which has returned 3.12% over the same period.

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The NIFTY PSU Bank Index is made up of 12 constituents, i.e., 12 public sector banks. Out of these, SBIN enjoys the highest weight of 32.69% in this index almost making up a third of it. The Nifty PSU Bank Index has broken out from a symmetrical triangle; a contribution from SBIN would be required for this index to move higher looking at the weight SBIN has in the Index.

A look at the daily chart of SBIN shows that the stock has broken out from a symmetrical triangle. It is important to note that symmetrical triangles are neutral formation and it is always prudent to wait for a price confirmation before taking on any directional bias. However, it should be noted that most of the time, such technical formations of symmetrical triangles act as continuation patterns and prices generally resolve in the direction of the trend. SBIN’s case is no different.

The other technical parameters also support a bullish view. The stock is inside the leading quadrant of the RRG when benchmarked against the broader NIFTY 500 index. A stock rolls inside a leading quadrant when both JdK RS Momentum and JdK RS Ratio cross above 100; this ensures relative outperformance of the stock against the benchmark. The Relative Strength line (RS line) against the broader Nifty 500 index is in a strong uptrend and is seen inching higher.

Zooming out to a higher timeframe weekly charts paints an equally encouraging picture. It was in December last year that the stock broke out from a year-long Symmetrical Triangle formation. It moved higher sharply, consolidated briefly, and is now seen resuming its move higher after a short breather.  The On-Balance Volume (OBV) at its high confirms the participation of volumes in the move.

Going by classical price target interpretation on the charts, SBIN can be expected to test Rs. 900 levels over the short-to-medium term. This could mean a potential appreciation of 12.50 % from its current levels. The stock may see some minor pullbacks; it can be accumulated in the Rs. 780-810 levels in that scenario. From a trade and risk management perspective, a close below Rs. 748 would trigger an exit from the stock.

-Foram Chheda, CMT

ChartTalk: Unlocking Potential: A Promising Investment Opportunity in Large Cap Metal Stock

ChartTalk: Unlocking Potential: A Promising Investment Opportunity in Large Cap Metal Stock

by | Mar 26, 2024 | ChartTalk

In the realm of investments, identifying opportunities that align with both technical indicators and fundamental analysis can pave the way for lucrative outcomes. One such prospect emerges within the domain of large-cap metal stocks, presenting an enticing avenue for investors seeking robust returns.

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A look at the daily chart shows that an uptrend started with TATASTEEL crossing above Rs. 110 levels in June 2023; this also marked the stock crossing above all three key moving averages. Since then, by and large, the stock has remained on a rising trajectory; the corrective phase that was seen between September and November last year found support at the 200DMA which subsequently led to the resumption of the uptrend.

Zooming out to see a bigger picture on the higher timeframe weekly charts, technically speaking,  it reveals compelling insights into the trajectory of this stock. Following a peak near Rs. 153 in July 2021, a corrective decline ensued, persisting for the subsequent year. However, the tide gradually turned as the stock began to form higher tops and higher bottoms, indicative of a shifting  underlying trend. Crucially, this move facilitated a notable ascent for the stock as it took it above both the 50-week and 100-week moving averages, underscoring a bullish undertone in the long-term trend. 

Recent developments have further bolstered confidence in the stock’s trajectory.  The stock recently tested the previous resistance near Rs. 150 levels  leading to the formation of a classical double-top on the weekly chart. Subsequently, a breakout from this established resistance ensued, accompanied by a surge in upside momentum. Despite a brief stint of selling pressure witnessed in the benchmark index, the stock remained resilient, retracing back to its breakout level before showcasing signs of resumption.

This resurgence has been underpinned by a uptick in trading volume, corroborating the prevailing bullish sentiment. Furthermore, indicators such as the On-Balance Volume and Relative Strength (RS) have lent credence to the optimistic outlook. Both indicators have experienced breakout moments from downward-sloping trendlines, signaling a favorable shift in momentum. Notably, the RS indicator showcases that the stock is outperforming the benchmark Nifty 500 index, further accentuating its appeal. 

Intriguingly, the RRG JDK RS Momentum indicator has crossed the 100 mark, indicating a notable uptick in momentum. This development augments the investment case, offering a compelling  opportunities for investors. 

Importantly, the Fed has hinted at three rate cuts this year. Even if one of two such rate cuts happens, it will keep the Dollar Index under check which is likely to aid the metal and commodities stocks. From an investment perspective, the breakout from a longstanding resistance after nearly two and a half years underscores the bullish momentum underlying this stock. Consequently, it presents an attractive proposition for investors, with the potential for an upside of approximately 10%. As a precautionary measure, any price movement below Rs. 140 may warrant reconsideration.

In summation, the confluence of technical indicators, coupled with favorable market dynamics, positions this large-cap metal stock as a promising investment opportunity.

– Foram Chheda, CMT

ChartTalk: Fortifying Portfolio with Prestigious Private Banking Powerhouse

ChartTalk: Fortifying Portfolio with Prestigious Private Banking Powerhouse

by | Jan 18, 2024 | ChartTalk

The overheated and overextended markets found a reason to correct following HDFCBANK’s quarterly numbers on the January 17th session. In the December quarter, a standalone net profit of Rs 16,372.54 crore was reported by the company, reflecting a year-on-year increase of 33.54%, as opposed to Rs 12,259.49 crore in the corresponding quarter of the previous year. This profit figure closely aligned with the expectations of financial analysts. Additionally, the net interest income (NII) for the quarter, representing the difference between interest earned and interest expended, saw a YoY growth of 23.9%, reaching Rs 28,470 crore compared to Rs 22,990 crore in the same quarter last year. However, the NII growth fell slightly below the anticipated 25% as per analyst estimates.

Markets did not like this; the stock tanked over 8% on that day. Regardless of this, a close study of HDFCBANK’s charts presents an interesting picture. In our previous edition of the “ChartTalk” newsletter, we technically analyzed RELIANCE and how it qualified as one of the star inclusions for the portfolio. Just like RELIANCE, this banking behemoth is one of those technically well-placed stocks that can perform well during this year and qualifies as an equally good inclusion in the portfolio.

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Let us first take a look at HDFCBANK’s relative comparison over the past year. The one-year rolling performance of HDFCBANK shows that the stock has underperformed the key indices of which it has been a part. The Nifty, Nifty Bank, and Nifty Financial Services indexes have returned positive returns of 18.75%, 8.49%, and 9.47% respectively. However, during the same time, HDFCBANK has grossly underperformed and has given a negative performance of (-6.10%).

Not just a Banking Behemoth…

Interestingly, if we look at the weight that HDFCBANK enjoys in different key indices, one can clearly see that it is not just a banking behemoth but an Indices behemoth as well.

HDFCBANK is the most weighted stock in Nifty 50 with 13.52%. Besides this, the stock makes up for a third of the Banknifty and Financial Services Index by being the highest-weighted stock at 29.39% and 33.16% respectively.

Highlighting the importance of “WHEN” in Technical Analysis

HDFCBANK marked its high of Rs. 1725 on October 22, 2021. Since then, the stock has never moved past that level again. It was on December 29th last year that the stock tested Rs. 1721.40 level again. This means that those who invested in the stock earned practically nothing until the end of 2023. The stock returned just 1.70% while Nifty gained over 19.96% over the same time.

On the other hand, those who could technically time the entry in the stock Rs. 1450 levels earned over 13% in just over seven weeks.

However, post reaction to the quarterly results, the stock is back to the levels from where it broke out.

Taking a look at the larger picture, the stock is near its long-term pattern support again after the stock declined following the reaction to the quarterly result. This pattern support is just above the 200-week MA which rests at Rs. 1420.

The uptrend that the stock witnessed in the last quarter of 2023 had come with strong volume support. This is reflected in the sharp rise that OBV had confirming the participation of volumes in the upmove. RSI is neutral and does not show any divergence against the price.

Conclusion:

Going by the pattern analysis, the stock eyes at good support in the range of  Rs. 1380-1420 levels. The present reaction to the quarterly numbers provides an entry point for investors looking to add HDFCBANK to their portfolio. However, it is strongly recommended to do this in a staggered manner. The best way would be to invest 50% of the available funds at the current price and the remaining can be added once after there is a technical confirmation of a potential base in place. As and when a high is taken out, any move above Rs. 1725 would result in a multi-month breakout in the stock.

Foram Chheda, CMT
Technical Research Analyst