Book profits on rallies as Nifty is witnessing a ‘Bearish Butterfly’ on the charts

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There is a fair chance of a reversal in the Nifty from current levels, but the possibility will negated will get negated on a close above 10,575 levels, according to Jay Purohit, Technical & Derivatives Analyst at Centrum Broking Limited.

Edited excerpts: 

It has been a roller coaster ride for the bulls last week. The index hit fresh record highs ahead of the Christmas holidays. Do you think the market would continue with its bullish momentum in the last week of 2017?

The week started with huge volatility due to the Gujarat Assembly election results. After a swing of more than 350-odd points in early trades on Monday, the Nifty managed to conclude the session in the green.

After that, the index traded in a narrow range for remaining part of the week and ended the week at record highs. Last week, the Nifty closed above its strong hurdle of 10,410 which led to a breakout on the daily chart.

At the current juncture, we are witnessing a formation of a Bearish Harmonic Pattern called ‘Bearish Butterfly’ on the daily line chart.

The ‘Potential Reversal Zone’ (PRZ) of the mentioned pattern is placed around 10,482 – 10,496 levels. Thus, there is a fair chance of a reversal in the Nifty from current levels. However, the possibility of a reversal will get negated on a close above 10,575 levels.

How is the market looking on the weekly as well as monthly charts?

Last week, the Nifty took support around its previous swing lows in the zone of 10,030–10,100 and rebounded piercingly to hit the 10,500 mark.

Since the index made multiple lows around the same level, the Nifty made a strong base in the zone of 10,030–10100.  Price-wise, there is no sign of reversal seen on both weekly and monthly chart; but the momentum oscillator ‘RSI’ is showing series of negative divergence on the weekly chart, which is not a good sign for the index.

Thus, a corrective move from current levels cannot be ruled out.

What should be the strategy — buy on dips or sell on rallies in the coming week?

Last week, we advised our clients to use the intraday declines as buying opportunity and the same panned out well for us. At the current juncture too, until Nifty sustains above 10,000 mark, buy on dips would be a prudent strategy for investors.

But short-term traders are advised to book some profit at current levels as we are witnessing a formation of the bearish harmonic pattern.

Also, aggressive traders may initiate a short trade below the immediate support of 10410-10370 spot levels for a target price of 10,150 -10,100. The stop-loss for that trade should be placed at 10,550 levels.

Which are the top 3-5 stocks which are looking attractive at current levels based on technicals?

Over the last few weeks, we are witnessing splendid move in selected stocks and we are focusing on the same. On the long side, few stocks are looking good at the current juncture too.

Strides Shasun: BUY| Target Rs995| Stop Loss 775| Time 2-3 months| Return 18%

Along with its peers, Strides Shasun too had a tough time in the last couple of years. After hitting a fresh three-years low in the last month, the stock has taken a support around the 127 percent retracement level of the previous upmove from Rs 837.45 to Rs 1,094.70 and made an ‘Inside Bar’ pattern on weekly chart.

This was followed by a positive momentum and thus indicates a possibility of a reversal in the counter. However, if we meticulously observe the weekly chart, we are witnessing a formation of a ‘Bullish Wolfe Wave’ pattern.

The momentum oscillator ‘RSI’ is also giving positive divergence on the weekly chart, indicating a reversal on cards. Thus, we advised our client to buy the stock around Rs 810.

However, at the current juncture too (Rs 836), one can go long for a target of Rs 960-Rs.995 in the coming two to three months. The stop-loss for the trade setup should be placed at Rs 775.

National Fertilizers Ltd (NFL): BUY| Target Rs 75| Stop Loss Rs64| Time 2-3 months| Return 11%

After a corrective move of around five months, the stock has taken support around the 50 percent retracement level of the previous rally from Rs 29 to Rs 87.65 and started moving in a sideways direction.

Currently, we are witnessing a breakout from the consolidation phase of last three months. Since a set of moving averages is placed positively along with ‘RSI’ oscillator on both daily chart weekly chart, we are expecting a continuation of the ongoing momentum.

Thus, traders can buy the stock for the target of Rs. 73-75 with the stop-loss of Rs 64.

M&M Ltd: BUY| Target Rs800| Stop Loss Rs730| Return 7%

The stock had given a breakout around 720 levels (adjusted price post bonus) in penultimate week and rallied higher. Last week also, we recommended to buy this stock and it worked perfectly on our expected line.

However, post the ex-date of bonus, we witnessed some correction on back of profit booking. But, the prices are still sustaining above the breakout levels and there is no sign of reversal seen on the chart. ‘RSI’ is also placed positively and thus showing strength in the counter.

Going forward, we are expecting the stock to rally toward Rs 800 and thus any correction towards Rs 725–730 would be a buying opportunity with a stop-loss of Rs 695.

How have FIIs positioned their portfolio?

FIIs are continuously selling in both cash market and index future segment in recent weeks. They have sold equities worth around Rs 7,700 crore in December so far.

They initiated fresh net shorts in index futures of more than 52,000 contracts in the last 22 days. As a result, their ‘Long Short Ratio’ in the index has gone from 68.30 percent (on November Expiry) to 51.60 percent, which doesn’t bode well for the bulls.