Focus on stock-specific deals for accumulation

Equity benchmark indices staged a decent comeback last week ended October 1, 2020, after the previous week's fall. The market continued last Friday's momentum. The NSE Nifty gained 367 points or 3.3 per cent and closed at 11,417 points. The BSE Sensex rallied 3.5 per cent. The Broader indices also performed in line with benchmarks.

The Nifty Midcap -100 and Smallcap-100 closed with 3.8 per cent and 3.7 per cent gains respectively. On the sectoral front, the Bank Nifty advanced by six per cent and the financial service gained by 5.9 per cent. Auto, metal and realty sectors closed three to four per cent higher. Including IT and pharma, all other sectoral indices closed higher. In September, the FIIs sold Rs11,410.69 crore, highest after March 2020. The DIIs bought just Rs 110.30 crore.

Technically, the Nifty formed an inside bar during the last week. It retraced almost 78 per cent of the previous downswing. It decisively closed above the 20 and 50-DMA after two days of hovering around them. The 20DMA still trending down, and the 50DMA flattened. On Thursday, the benchmark indices higher by 1.51 per cent, the volumes are lower than the previous day.

As we mentioned earlier, the current market condition is similar to the Oct-Feb structure. Our stance further confirmed by the recent price action. Compare price action on the August 31-October 1 to January 20- February 12. It is almost exactly similar. We argued that Oct-Feb is nothing, but a topping formation with a distribution. The current price action since late July to the latest is also a topping formation. With seven distribution day count, we can classify it as distribution phase or a stage-3 formation. Now, the question is 'Will History Repeat?'

In any conditions, the follow-through is important to confirmation of a trend. The last week's rally requires a follow-through. Unless the buying interest continues with a decent volume, we can't assume that the trend has reversed. The Nifty closed near to the sloping resistance line, which connected to two prior tops.

A close above this resistance line will be the first signal, and a close above prior swing high of 11,618 will be the confirmation for a trend reversal. Before that, there is another resistance line, which drawn from the April lows. Shaun Downey's peak expansion or a fractal pivot placed at 11,794. Unless this level is taken out, the probability of continuing the current short term is high.

There are already two lower tops and two lower bottoms in place, which meets the Dow Theory about the trend reversal. In any case, Thursday's high (11428) is protected and closes in negative territory, 11428 could be the third lower top. In any case, it closes below the 20 and 50-DMA's, that is the end of the current upside move. In such a case, we can expect the downswing like the previous week, which can go below the 11790. In another way, as the Nifty formed an inside bar on the weekly chart, we need to wait for a weekly close above 11,535 for an uptrend to continue.

But for a downside move, a close below the current bar low (11,100) is enough for a confirmation for a resumption of a downtrend.On the indicators front, the RSI (54.67) is at an influx point. It exactly closed at a resistance line and the prior support. A move above 62 levels is a positive signal for the index and overall Market. The directional movement indicator and a trend strength indicator ADX has not turned up even though index went up.

In fact, it is further moved down and expressing doubts about the trend strength. In a nutshell, it is not a time to be complacent. There is an element of doubt about the upside move. But we need confirmation for a bearish move. As long as 11,618 is protected on the upside, it is better to be in sidelines. Unless another over 1.5 per cent up day with an above-average volume, I am convinced to take long positions. Focus on the stocks with good relative strength and accumulation.

(The author is a financial journalist and technical analyst. He can be reached at [email protected])