The markets have been on a roll this year. The global equities had a strong year and Indian equities were no exception. The headline Index NIFTY50 has gained 17.32% on a YTD basis. The broader markets fared even better with the broad market index NIFTY500 returning 22.75% over the same period. Looking at sector indices, all sectors have ended positively with the maximum gains coming from the Realty space with the NIFTY Realty Index gaining 74.97%. In comparison, Banknifty has performed least returning 9.93% on a YTD basis.

The markets in general are undoubtedly overheated and stare at imminent consolidation. So, when it comes to looking for stocks that still have room for themselves, is an equally difficult task. During such times, it is of paramount importance that one should look for stocks that have either a strong or improving relative strength or have not run too far ahead of their curve.

One such stock is that of an energy major, Reliance Industries Limited (NSE: RELIANCE). A closer look at the technical charts and the stock’s performance throws interesting insights.

RELIANCE has the second largest weight in the Nifty Index at 9.11% after HDFCBANK which has the highest weight at 13.25%. When we look at the Nifty Energy Index, the sector index of which RELIANCE is a part, the stock has the highest weight of 31.32%. The energy index’s top five constituents make up over 77.09% of the Index. RELIANCE alone makes up one-third of this sector index.

Given its important and heavy place in both the frontline as well as the sector Index, RELIANCE has relatively underperformed both the NIFTY ENERGY Index and NIFTY50 on a YTD basis. Looking at the YTD data, while the NIFTY ENERGY Index and NIFTY50 have returned 26.04% and 17.32% respectively on a YTD basis, RELIANCE has returned just 9.32% over the same period.

This leaves a lot of room for potential resilient performance and some alpha generation in the stock.

The weekly chart for RELIANCE shows that over the past three years, the stock hasn’t practically returned anything. It tested the level of Rs. 2482 in October 2021; since then, it has just moved sideways in a broad trading range. Besides making incremental highs, it has failed to get any directional uptrend. This means that anyone who has invested in the stock around or after October 2021 may find herself sitting with nil to very negligible gains.

However, going by the recent price action, the stock looks set for a fresh breakout again. When this is read along with other technical indicators, it paints a prettier picture.

Going by the pattern analysis, RELIANCE is seen trying to break out from a rectangle pattern. The potency of the move can be gauged by the price making a higher bottom inside the rectangle before trying to break out of it.

On-Balance Volume, which is a volume oscillator, has already hit a new high before the stock doing so; this is a sign that the attempt to break out of this technical pattern is supported by higher volumes. The rolling of the stock inside the improving quadrant of the RRG hints at a potential beginning of a phase of relative outperformance of the stock against the broader markets.

While RSI marks a fresh 14-period high, the weekly MACD stays positive and above its signal line.

If the markets consolidate, the stock is likely to show strong resilience and it enjoys robust support in the Rs. 2300-2400 range so long as it keeps its head above Rs. 2300 level. Anty slip below this will negate this technical reading.

Going by this, even if we see some temporary retracement or minor consolidation, the stock qualifies for inclusion in the portfolio. One can start to accumulate RELIANCE at current levels with each minor decline if at all that happens. Applying the classical price measurement implications, the stock has the potential to test Rs. 2900 levels in the coming year which would mean a potential price appreciation of 13.25% from the current levels.

Foram Chheda, CMT
Technical Research Analyst