ChartTalk: Navigating the NIFTY IT Index: A Promising Opportunity Amidst Consolidation

ChartTalk: Navigating the NIFTY IT Index: A Promising Opportunity Amidst Consolidation

by | Jul 30, 2023 | ChartTalk

On June 21st, the NIFTY reached new all-time highs, sparking optimism in the market. However, it soon slipped into a broad-ranged consolidation, dampening the spirits of investors. Despite this, the IT sector had been displaying encouraging signs of improvement in its relative momentum against the broader markets. Here, we’ll delve into the performance of the NIFTY IT Index, its technical structure, and the potential opportunities it presents for investors in the short to medium term.

NIFTY IT Index Performance:

Despite the NIFTY’s fresh lifetime highs, the NIFTY IT Index lags behind, still far from the record highs seen in January 2022. Its relative underperformance has been evident for several quarters, with a YTD return of just 3.30% compared to the NIFTY’s 8.51% gains during the same period. Weak earnings and guidance from Infosys disrupted the IT Index’s performance. However, this presents a favorable chance for investors to selectively pick stocks from the IT sector for short to medium-term gains.

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Technical View:

The NIFTY IT Index has displayed a strong and consistent uptrend since the COVID lows in March 2020. It reached its peak at 39446 in January 2022, marking an impressive rally of over 255% from its lows. Subsequently, a classical reversal pattern of Head and Shoulders emerged, with the IT Index violating the neckline in April 2022, leading to its underperformance in the market.

The IT Index experienced a retracement of 30% from its highs, with multiple tests of the support level at 26180. At present, it remains in a sideways consolidation phase, with resistance noted at 31565.

Weekly and Daily Chart Indicators:

On the weekly chart, the NIFTY IT Index has hovered around the crucial 50-week moving average (MA), indicating a cautious market outlook. However, the daily chart offers some positive momentum within the broader consolidation range. A noteworthy development is the occurrence of a “golden crossover” on the daily chart, where the 50-day moving average crossed above the 200-day moving average. This suggests a shift toward bullish sentiment in the short term.

Reversing Underperformance:

For the NIFTY IT Index to regain its leading position and outperform the broader market, two critical technical conditions must be met. Firstly, it needs to enter the Improving Quadrant on the Relative Rotation Graph (RRG), which will happen when the JdK Momentum crosses above 100. This would signal the beginning of a phase of relative outperformance for the IT sector. Secondly, the IT Index must break above the current resistance level at 31565, signifying a breakout from the ongoing consolidation phase.

Promising Prospects Ahead:

Once these technical conditions are fulfilled, we can expect the IT sector to regain its leading position and deliver alpha-generating returns on investment. This resurgence would benefit both large-cap and mid-cap IT stocks, providing investors with a promising opportunity to capitalize on the sector’s potential.

Despite recent underperformance, the NIFTY IT Index shows promise for investors with its technical structure and positive momentum indicators. A potential breakout from the current consolidation phase and entry into the Improving Quadrant on the RRG could herald a new era of outperformance for the IT sector. As always, investors should conduct thorough research and consider their risk tolerance before making any investment decisions in the market.

-Foram Chheda, CMT

ChartTalk: Crude Oil at Critical Support Levels: Future Trend Hinges on These Levels

ChartTalk: Crude Oil at Critical Support Levels: Future Trend Hinges on These Levels

by | Jun 30, 2023 | ChartTalk

WTI US Oil has entered a period of consolidation, influenced by various factors including supply-demand dynamics, and market sentiments among others. This technical note aims to examine the current price movements of Crude Oil and analyze the crucial support and resistance levels that will determine its future trend. By combining technical analysis with fundamental factors, we provide valuable insights for traders and investors.

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Relative Performance Compared to Gold

When comparing the performance of Crude Oil with Gold (XAUUSD), it is evident that Crude Oil has remained relatively flat, experiencing a modest weekly gain of 1.32%. On the other hand, Gold has seen a marginal decline of approximately 0.05% on a weekly basis. The Relative Strength line (RS Line) suggests that Crude Oil is underperforming Gold, indicating that investors are favoring the precious metal over Crude Oil in the current market conditions.

Technical Analysis: Key Support and Resistance Levels

A critical observation in the chart of WTI US Oil is the consistent support near the 66-67 price levels. This range has proven to be a crucial support area, with the price finding significant buying interest and rebounding multiple times. Furthermore, this support level aligns with the 200-week moving average (MA), further reinforcing its importance. The current value of the 200-Week MA stands at 67.48.

On the upside, strong resistance is encountered near the 74-75 levels. This range has acted as a formidable barrier, limiting upward movements and causing price retracements. Traders and investors closely monitor this level as a breach or breakout has the potential to determine the further direction of WTI US Oil.

Daily Chart Analysis: Bearish Trend Prevails

Examining the daily chart, it becomes evident that WTI US Oil is currently experiencing a downward trend. The price remains below multiple moving averages, including the 10-day, 40-day and 200-day moving average. This configuration indicates that selling pressure outweighs buying pressure, contributing to the prevailing bearish sentiment in the market.

Traders should closely monitor any breakouts or breaches of the support and resistance levels. A breach below the support may indicate further downside potential, while a breakout above the resistance could signal a bullish reversal. Until these events occur, the price is likely to continue consolidating within the established range.

Long-Term Trend Analysis

Since reaching a high at 126.48 in March 2022, Crude Oil has been on a declining trajectory. The subsequent lower top at 121.36 in June 2022 further confirms the bearish trend. In August 2022, the 10-Week MA crossed below the 40-Week MA, signaling a shift in momentum. Currently, the 10-Week MA and 40-Week MA are at 71.01 and 77.52 respectively.

Technical rebounds are expected to be limited by the 40-Week MA, which currently stands at 77.52. A bearish trend would reverse only if Crude Oil is able to cross and move above this price level. On the downside, strong support exists in the form of the 200-Week MA, currently placed at 67.48. As long as the price remains below the 10-Week and the 40-Week MA, upside potential will be limited. However, breaching the 200-Week MA could lead to further weakness for Crude Oil. Traders should closely monitor the price behavior against the 67 support level.

Consideration of Fundamental Factors

While technical analysis provides valuable insights, it is crucial to consider fundamental factors that can influence the price of WTI US Oil. Global demand, geopolitical events, and supply dynamics play significant roles in determining the future trajectory of Crude Oil. Traders and investors should closely monitor these factors alongside technical indicators to analyze the further movement in US Oil.

Conclusion

In conclusion, the current price movements of WTI US Oil indicate a bearish trend, with strong support near the 66-67 price levels and resistance near the 75-77 levels. Technical analysis suggests that the price is likely to continue consolidating within the established range until a breakout or breach occurs. Long-term trend analysis confirms the bearish sentiment, with the 10-Week MA below the 40-Week MA. Fundamental factors such as global demand and supply dynamics should also be considered when analyzing the future trend of WTI US Oil. Traders and investors can use this information to make informed decisions and navigate the market effectively.

Foram Chheda, CMT

ChartTalk: Analyzing the Dollar Index: Technical Setup and Contributing Factors

ChartTalk: Analyzing the Dollar Index: Technical Setup and Contributing Factors

by | May 28, 2023 | ChartTalk

The US Dollar Index (DXY) is a powerful tool for traders and investors alike, providing a snapshot of the value of the US dollar against a basket of major currencies. But understanding the factors that drive the index can be a complex and challenging task. From economic indicators and geopolitical events to interest rate policies and global market trends, there are a myriad of factors that can impact the value of the dollar.

In the first half of 2021, the DXY established a significant base and witnessed a subsequent rally, reaching a high of 114.75 in September of the same year. This technical note examines the technical setup of the DXY, highlighting its recent rebound and potential resistance levels. Additionally, we explore other factors, including the impasse over the US Debt Ceiling and contrasting economic performances between the United States and Germany, that have influenced the strength of the Dollar Index.

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Technical Analysis: Establishing a Base and Rebound

Analyzing the weekly charts of the Dollar Index reveals an intriguing pattern. After reaching its peak at 114.75 which was seen in the second half of 2022, the DXY underwent a retracement phase, ultimately forming a double-bottom support at 100.80. This retracement found support at the 100-week moving average (MA), leading to a rebound. Based on this technical setup, the DXY has the potential to test the resistance level of 105.75, which aligns with the 50-week MA. These levels serve as crucial indicators for traders and can significantly impact short-term movements in the Dollar Index.

Short-Term Indecisiveness and Key Support

Examining the daily charts, we observe that the DXY is currently experiencing an upward movement. However, the formation of a Doji Candlestick pattern suggests indecisiveness in its short-term trajectory. A breakthrough above the 105.75 level would inject further strength into the Dollar Index. Conversely, the level of 100.80 remains a vital short-term support level, providing major support in case of any volatile price fluctuations.

Contributing Factors: US Debt Ceiling and Economic Data:

Aside from the technical setup, several factors have influenced the strength of the Dollar Index. One of the contributing factors is the recent impasse over the US Debt Ceiling. The uncertainty surrounding this issue has created additional support for the US Dollar, as investors seek safe-haven assets amidst concerns of a potential US default.

Furthermore, recent economic data from the United States has played a role in bolstering the Dollar Index. Reports indicate that weekly initial jobless claims rose slightly by 4,000 to reach 229,000. Additionally, the second estimate of first-quarter gross domestic product (GDP) growth confirmed a slower rate of expansion, albeit revised upward to 1.3% from the initial 1.1%. These figures suggest that the anticipated recession forecasted for 2023 may not materialize, prompting a positive response in the market and keeping interest rates on an upward trajectory, thereby contributing to the buoyancy of the Dollar Index.

Contrasting Economic Performances: Germany and the Euro:

In contrast to the United States, Germany, the largest European economy, experienced a recession in the first quarter of the year, with GDP declining by 0.3%. This economic downturn resulted in a weakening of the euro, which subsequently propelled the Dollar Index to a two-month peak. The diverging performances of these two economic powerhouses further supported the strength of the Dollar Index.

Conclusion: Assessing the Dollar Index’s Outlook:

Considering the technical setup and the various contributing factors discussed, it becomes evident that the Dollar Index currently finds strong support at 100.80. Although it may encounter significant resistance at 105.75, a substantial breakthrough at this level would reinforce its strength and potentially trigger further upward movement. Traders and investors should closely monitor the upcoming Fed meeting in June, as the probability of a 25 basis point rate hike stands at approximately 53%. A potential pause in rate hikes may result in a minor retracement of the Dollar Index from its current levels.

Foram Chheda, CMT

ChartTalk: Let Us Learn As We Earn; Understanding Inverse H&S Pattern And Applying It To This Chemical Stock

ChartTalk: Let Us Learn As We Earn; Understanding Inverse H&S Pattern And Applying It To This Chemical Stock

by | Apr 29, 2023 | ChartTalk

The head and shoulders pattern is considered one of the most reliable indicators of a trend reversal, as it reflects a shift in market sentiment.

A head and shoulders pattern is a common chart formation that indicates a reversal of a bullish trend to a bearish trend in technical analysis. It consists of three peaks, with the middle one being the highest and the outer two being roughly equal in height. The pattern is completed when the price breaks below the neckline, a horizontal line connecting the two troughs between the peaks.

Exactly opposite to this, there is an “Inverse” or “Inverted” Head & Shoulder Pattern which is also a reversal pattern — but — a bullish reversal pattern.

The inverse head and shoulders pattern is the opposite of H&S  formation, signaling a reversal from a bearish trend to a bullish trend. In rare cases, this can also act as a continuation pattern; however, in most instances, this acts as a bullish reversal pattern, and for this pattern to be a valid one, an existence of a prior downtrend is a must.

Let us better visualize and understand this pattern in real-life scenario by applying it to this fine and speciality chemical stock.

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Clean Science and Technology Ltd (CLEAN:NSE) has seen the development of an “Inverse Head & Shoulders” formation. If we look at the price analysis of CLEAN, after marking the high point near 1977 in September last year, the stock slipped under corrective retracement. The correction that followed not only saw the stock slipping below key moving averages, but it also went on to test the lows near the 1270 levels.

However, a higher bottom prior to this low and a higher bottom after this low point led to the formation of the Inverted Head and Shoulders. This formation took shape over the past two months; this remains a perfectly valid inverse H&S formation as it has developed following a steady downtrend.

While the stock remains under this formation and awaits a breakout, the OBV (On-Balance Volume) indicator has already hit a new high; this is bullish as it shows stock accumulation at lower levels and participation of volumes in the up-move.

The RSI, which can also be subjected to regular pattern analysis, shows a similar formation. Any breakout here along with or prior to the price breakout will have bullish implications for the stock.

Going by the classical price measurement implications, if this Inverse H&S pattern stages a breakout, the stock has the potential to test 1665 to 1700 levels over the coming weeks. 

A price target is measured by taking the distance from the neckline to the lowest point of the head and adding it to the breakout point.

A close below the left shoulder, i.e., below 1365-1360 would negate this technical setup.

Foram Chheda, CMT

ChartTalk: Is Gold Ready to Break Out? This Level Holds the Key!

ChartTalk: Is Gold Ready to Break Out? This Level Holds the Key!

by | Mar 30, 2023 | ChartTalk

Investment demand for gold surged in 2020 due to the COVID-19 pandemic, which triggered a global recession, unprecedented monetary and fiscal stimulus measures, and heightened market volatility. According to the World Gold Council (WGC), global gold-backed exchange-traded funds (ETFs) saw record inflows of 877 tonnes in 2020, surpassing the previous record of 646 tonnes in 2009.

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Gold is one of the most sought-after commodities in the world. It has been used as a store of value, a hedge against inflation, and a safe haven asset for centuries. But can gold continue to shine in the current market scenario?

Gold has been in a strong uptrend since 2019 when it broke out of a multi-year consolidation pattern. It reached an all-time high of 2075 in August 2020, before correcting to 1765 in November. Since then, it has bounced back to test the previous high twice, forming a double-top pattern.

A double top consists of two peaks that are roughly equal in height, separated by a trough. Although a double top is considered resistance from a technical perspective; however, any consolidation near the high point indicates strength.

Gold has strong support that exist around 1900. It is currently trading between 1950-2000, which is a critical resistance zone. If gold can break above 2000 and sustain above it, it will stage a breakout and invalidate the double-top pattern and resume its uptrend. However, if gold fails to break above 2000 and falls below 1900, it will confirm the double top pattern and can stay under broad consolidation for some more time.

The monthly chart shows some positive signs for gold. The moving average convergence divergence (MACD) indicator, which measures the momentum and trend direction of an asset, has crossed above its signal line and turned bullish. This indicates that the buyers are gaining strength and could push the price higher.

From the Indian context, Gold has been trading in a narrow range for the past few weeks, as it faces strong resistance at 60000 levels. This level has been tested several times but failed to break above it convincingly. A sustained move above 60000 would signal a bullish breakout for the precious metal, opening the door for further gains towards 65000 rupees and beyond. However, if gold fails to overcome this hurdle, it may consolidate with the support that exists in the 55000-56000 zone.

Another factor to consider is the relative performance of gold against silver. Gold and silver are often correlated, as they are both precious metals that respond to similar market forces. However, sometimes they diverge, as they have different industrial and monetary uses.

The relative strength (RS) line of gold against silver shows how gold is performing relative to silver. A rising RS line means that gold outperforms silver, while a falling RS line means silver outperforms gold.

The RS line of gold against silver has been broadly rising since 2011, indicating that gold has been more favored than silver over the long term. However, in the past year, the RS line has been mostly flat, indicating that both metals have been performing similarly. This suggests that there is no clear advantage for either metal at the moment.

As of now, the price behavior of Gold in the 1950-2000 range needs to be closely watched. Any meaningful move above 2000 is likely to take the precious metal higher toward 2070-2075 levels. However, until that happens, we might well see Gold consolidating in a 1900-2000 zone.

Foram Chheda, CMT