What charts say about 6 key sectors and how to play them

Gurumurthy K |BL Research Bureau | Updated on: Aug 06, 2022

Do note that all the indices are selected purely based on the price action seen on the charts using technical analysis

The year 2022 has so far been very volatile for the Indian stock markets. The benchmark indices, Sensex and Nifty 50, have been oscillating up and down. On a year-to-date (YTD) basis, these indices have gone nowhere. Sensex is up just 0.24 per cent and Nifty 50 is up 0.25 per cent.

Tracking the Sensex and Nifty 50 will give an idea on the broader market. But dissecting the market sector-wise can give us an opportunity to identify the outperformers that can even beat the broader indices. It can also help us stay away from the laggards.

Sectoral indices such as the Nifty Auto (up 17 per cent), Nifty PSU Bank (up 12 per cent) have clearly beaten the benchmark indices in its performance so far this year. On the other hand, Nifty IT (down 23 per cent), Nifty Pharma (down 9 per cent) have underperformed.

This is very different from 2021, in which the Nifty Metal surged the most (69.66 per cent), followed by the Nifty IT and Nifty Realty indices which were up 59.58 and 54.26 per cent respectively.

However, currently, the Nifty Metal index has given back all the gains made in the first quarter of this year and is flat now. The Nifty IT index has tumbled 23 per cent this year and is the worst performer.

Here, we look beyond the benchmarks and use technical analysis to see what’s in store for the sectoral indices and how investors can benefit from the outlook.

For this analysis, we have classified our study under three categories. The first group consists of sectors that look attractive currently. The second is a set of sectors which are still vulnerable to a fall and have to be kept on the side-lines for some time. Thirdly, the ones that can consolidate sideways for some time and then give us a clarity on the direction after a breakout are considered.

Under each category, we have picked up two sectoral indices and given the outlook for the same. Investment avenues like the Exchange-Traded Funds (ETFs) for investing in the whole index are mentioned. Specific stock picks from the index pertaining to those sectoral indices are also given.

Do note that all the indices are selected purely based on the price action seen on the charts using technical analysis. The stock picks are also based on technical analysis. Investors should keep in mind that there is risk of loss in trading and ‘stop loss’ should be strictly adhered to. For ETFs, investors should consider factors such as tracking error, trading volumes (liquidity) and variation between market price and NAV before zeroing-in on one.

SECTORS TO BUY NOW

Nifty Auto (12,804.35)

The momentum in the automobile sector continues. After a 19.25 per cent rally in 2021, the Nifty Auto index has risen another 17 per cent so far this year. TVS Motor Company and Mahindra & Mahindra are outperformers in the index. They are up 51 per cent and 48 per cent respectively. Stocks like Escorts Kubota (-14 per cent) and Sona BLW Precision Forgings (-25 per cent) have underperformed.

Index levels to watch
Supports: 12,000, 11,280
Resistances: 13,400, 14,100

Outlook: The Nifty Auto index is looking very bullish from a long-term perspective. It has strong support at 12,150-12,000. Immediate resistances are at 13,400 and 14,100. These levels can be tested in the next two-three months.

Though there can be intermediate dips, a fall below 12,000 looks less likely. On the charts, the upside is open to test 17,300-17,500 over the next four-six quarters.

ETFs available: ICICI Prudential and Nippon India Nifty Auto ETF

Index stock pick: Eicher Motors (₹3,089.6) looks a good buy now. It can rise to ₹4,000 from here. Have a stop-loss at ₹2,800.

Nifty Private and PSU Banks

The Nifty PSU Bank (2,829.4) and Nifty Private Sector Bank (19,251.15) indices are up 12 per cent and 6 per cent respectively this year. Bank of Baroda (+44 per cent) and Indian Bank (+25 per cent) have outperformed. Indian Overseas Bank (-13 per cent) and Central Bank of India (-14 per cent) have underperformed in the PSU space.

In the Private sector, Federal Bank (+30 per cent) has outperformed and RBL Bank (-24 per cent) is the underperformer.

We have considered these indices rather that the Nifty Bank index. It is because these indices look more convincingly bullish on the charts than the Nifty Bank index.

Index levels to watch
Supports: 18,500, 16,300
Resistances: 23,000, 25,000

Outlook: The long-term outlook for the Nifty PSU Bank and Nifty Private Bank indices is bullish. Nifty PSU Bank index (2,861) has an immediate resistance at 3,070. A strong break above it will indicate an inverted head and shoulder pattern on the chart. Such a break will pave way for a strong rally to 4,000-4,100 over the next one year.

The Nifty Private Bank index (19,310) has clearly broken the downtrend that was in place since October 2021. It is bullish to test 23,000-23,500 by the first half of next year.

ETFs available: Kotak Nifty PSU Bank ETF, Tata Nifty Private Bank ETF and ICICI Prudential Nifty Private Bank ETF.

Index stock picks: Among private banks,  Federal Bank (₹108.95) can rise to ₹135 in the short term and ₹175 over the long term. Keep the stop-loss at ₹84.

In the PSU Banking space, Bank of Baroda (₹117.9) has room to rally towards ₹210 from here. Stop-loss should be kept at ₹88.

SECTORS THAT CAN FALL

Nifty IT (29,973.55)

The index is down 23 per cent for the year. Tech Mahindra and Wipro are the most beaten-down stocks within the index. They are down 41 per cent and 38 per cent respectively. The index heavy-weights Infosys (down 14 per cent) and Tata Consultancy Services (down 10 per cent) have not declined much unlike others.

Index levels to watch
Supports: 25,000, 22,000
Resistances: 30,000, 30,600  

Outlook: The trend is down. The recent bounce from the July low of 26,189.4 is just a corrective bounce. Immediate resistance is at 30,000. Higher resistance is in the 30,500-30,600 region. The chances are high for the index to reverse lower from any of the above-mentioned resistances. That leg of fall can drag the index down to 25,200-25,000 at least. In a worst-case scenario, the fall can extend even up to 23,000-22,800 by the year-end.

This is not the right time to invest in the IT sector. Investors willing to step into the IT space will have to wait for a fall to 25,200-25,000 on the index to enter.

ETFs available: Kotak Nifty IT ETF, ICICI Prudential Nifty IT ETF, Nippon India Nifty IT ETF, AXIS Nifty IT ETF

Index stock pick: Wipro (₹439.9) looks a good buy at ₹385 and ₹365. Can rise to ₹510 and higher from a long-term perspective. Stop-loss has to be kept at ₹320.

Nifty Pharma Index (12,939.75)

After outperforming and riding the Covid-19 wave for two years (2020 and 2021), the Nifty Pharma index has become the second worst-performing index for this year so far. It is down 9 per cent. Gland Pharma (-41 per cent), Lupin (-30 per cent) and Glenmark Pharmaceuticals (-28 per cent) are the most beaten-down in this index. However, a few stocks have managed to ride the tide. Cipla (+9 per cent), Sun Pharmaceutical Industries (+8 per cent) and Abbott India (+5 per cent) are still up for the year.

Index levels to watch
Supports: 11,000, 10,800
Resistances: 13,300, 14,000

Outlook: The trend is down. There is a strong resistance in the 13,200-13,300 region. Though a rise to test this resistance is possible this month, a rise beyond 13,300 is unlikely. The index can turn down again from the 13,200-13,300-resistance zone and can keep the overall downtrend intact. A fresh fall from there will have the potential to drag the Nifty Pharma Index down to 11,000-10,800 by this year-end or in the first quarter of next year.  

So, investors will have to wait for one more leg of sell-off. The fall to 11,000 mentioned above will be a very good buying opportunity from a long-term perspective.

The index has to rise past 13,300 decisively to negate the bearish view and indicate a trend reversal.

ETFs available: Nippon India Nifty Pharma ETF.

Nifty Heathcare ETFs can also be considered as the Nifty Healthcare index move in tandem with the Nifty Pharma index ICICI Prudential Nifty Healthcare ETF, Axis Nifty Healthcare ETF and Aditya Birla Sunlife Nifty ETF are the options available.

Index stock pick: Biocon (₹313.3) can be bought in two tranches. First level of buy can be at ₹292 and can be accumulated at ₹260. Keep the stop-loss at ₹175. Targets can be ₹400 and ₹600.

SECTORS THAT CAN BE RANGE BOUND

For this category we have taken the indices from those in the Bombay Stock Exchange (BSE) as the history of data available for analysis are more in the BSE than those in the National Stock Exchange (NSE).

BSE Oil & Gas Index (19,336.58)

After surging 24 per cent in 2021, the rally in the BSE Oil & Gas index has paused this year. Though the index is up over 9 per cent so far, broadly it has been oscillating in a sideways range. The index has been range bound between 16,380 and 20,460 since September last year. Adani Total Gas has surged 95 per cent this year. Reliance Industries and GAIL are up over 7 per cent each. Gujarat Gas (-31 per cent) is the most beaten-down stock in this index.

Index levels to watch
Supports: 17,000, 16,380
Resistances: 20,460, 24,000

Outlook: As mentioned above, 16,380-20,460 is the range which is still intact. One has to wait for this range to be broken on either side to get clarity on the next direction of move. From the price action on the charts, the bias is positive. So, we place higher probability for the index to break the range above 20,460.

Such a break can open doors for a fresh rally to 23,700-24,000 over a period of six to 12 months after the breakout happens. It is prudent to adopt a wait-and-watch approach.

Index stock pick: Keep a watch on Indian Oil Corporation (IOCL). The stock, currently at ₹73, will become a very good buy as it comes down from there. It can be bought at ₹54 with a stop-loss at ₹38. Targets are ₹90 and ₹110.

BSE Metal Index (18,354.26)

The index saw a strong sell-off in the second quarter of this year. That had wiped out all the gains made in the first quarter. Though it has bounced back well from the low of 14,853, the index is still down 5 per cent for the year.

Index levels to watch
Supports: 15,000, 14,500
Resistances: 18,200, 19,350

Outlook: The recovery from the low of 14,853 is not showing any confirmed sign of a reversal yet. There are key resistances at 18,200 and 19,350. The index has to rise past 19,350 decisively to confirm a trend reversal. Else, the chances of it falling back to 15,000 and 14,800-14,500 levels cannot be ruled out.

In that case, a broad range consolidation between 14,500 and 19,350 can be seen for a few months. So, investors have to either wait for the index to break above 19,350 or make use of the fall to 15,000-14,500 to enter into this sector.

Index stock pick: While the sector needs a wait-and-watch approach, based on a reading of the charts for individual stocks, JSW Steel can be bought at current levels of ₹667. Accumulate the stock on dips at ₹560. It can rise to ₹1,000 from a long-term perspective. Stop-loss is to be kept at ₹440.

Published on August 06, 2022
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