ChartTalk: Is This Extended Consolidation a Trend Pause or Reversal For This Healthcare Provider?

ChartTalk: Is This Extended Consolidation a Trend Pause or Reversal For This Healthcare Provider?

by | Feb 22, 2025 | ChartTalk

The Rectangle pattern is a well-recognized price formation in technical analysis that represents a consolidation phase before the price makes a decisive move. It indicates a temporary balance between buyers and sellers, where the price fluctuates within a defined horizontal range. This pattern does not inherently suggest a directional bias but signals that the market is awaiting a catalyst for a breakout.

Identifying a Rectangle Pattern

A Rectangle is characterized by two parallel horizontal lines—one acting as resistance and the other as support. The price moves between these boundaries multiple times without breaking out, creating a sideways market. For a pattern to be considered a valid rectangle, the price should touch both the support and resistance levels at least twice. The longer the consolidation lasts, the more significant the breakout tends to be.

Volume often declines as the pattern develops, reflecting reduced conviction among market participants. However, volume expansion at the breakout level is a crucial factor, as it confirms the strength of the move. Rectangles can form over varying timeframes, from intraday to several months, but larger formations typically lead to stronger breakouts.

Interpreting the Rectangle: Continuation vs. Reversal

A rectangle can function either as a continuation pattern or a reversal pattern, depending on its position within a larger trend. Traders analyze the preceding price action and breakout direction to determine the likely outcome.

A rectangle pattern can serve as either a continuation or a reversal, depending on its context within the broader trend. When it forms within an ongoing trend, it typically represents a pause in momentum before the trend resumes—a breakout above resistance in an uptrend signals further upside, while a breakdown below support in a downtrend suggests continued selling pressure. Volume expansion on the breakout reinforces the strength of the move. However, when a rectangle appears after a prolonged trend, it may indicate trend exhaustion and potential reversal. A breakdown below support after an uptrend signals a bearish shift, while a breakout above resistance following a downtrend suggests a bullish reversal. In such cases, higher volume during the breakout against the prior trend strengthens the reversal signal, confirming a change in market sentiment.

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The chart of Narayana Hrudayalaya Ltd (NH) presents a well-defined Rectangle pattern, forming a year-long consolidation phase. The stock has been oscillating between a well-established resistance zone near ₹1,400 and a support level around ₹1,170, reflecting a state of equilibrium between buyers and sellers.

Why Continuation is More Likely

Rectangles are often trend continuation patterns, especially when they occur midway in an ongoing uptrend. The stock has been forming higher lows within the range, indicating accumulation rather than distribution. Additionally, RSI (Relative Strength Index) is holding above 50, suggesting that bullish momentum remains intact. A breakout above ₹1,400 would confirm trend continuation, fueled by fresh buying interest.

Given the strong prior uptrend, range-bound accumulation, and sustained RSI strength, the pattern leans towards a bullish breakout and continuation. Investors should watch for volume expansion on the breakout to validate trend resumption.

Foram Chheda, CMT

ChartTalk: Spotting Opportunities in This Sector as Relative Strength Improves

ChartTalk: Spotting Opportunities in This Sector as Relative Strength Improves

by | Jan 19, 2025 | ChartTalk

Relative Strength (RS) is one of the core indicators in the technical analyst’s toolbox, widely used to evaluate the performance of a stock or Index relative to a benchmark, such as a broader market index. Constructed as the ratio of the stock’s price to the benchmark’s price, RS is often plotted as a line that helps identify whether a security is outperforming or underperforming the benchmark over a specified period. This indicator is particularly valuable because it provides a clear, visual representation of relative performance trends, making it easier for technicians to focus on stocks or sectors that are leading the market.

 The interpretation of Relative Strength lies in its ability to highlight emerging trends and relative outperformance, which is critical for making informed investment decisions. When the RS line is rising, it indicates that the stock or Index is outperforming its benchmark, while a declining RS line signals underperformance. This insight allows investors to align their portfolios with strong-performing securities while avoiding laggards. Additionally, RS can be combined with other technical tools to confirm breakout patterns or validate sectoral momentum, making it an indispensable element for identifying opportunities and generating alpha in a structured manner.

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The year 2025 has begun on a cautious note, with benchmark indices trading below key resistance levels and the primary uptrend disrupted. Identifying Relative Strength (RS) within a portfolio becomes increasingly critical in such uncertain conditions. Strong RS not only enhances a portfolio’s performance relative to its benchmarks but also provides resilience during volatile periods. Moreover, RS plays a pivotal role in spotting emerging strengths across sectors and individual stocks, offering insights into future opportunities.

A Relative Strength analysis of the Nifty Energy Index against the broader Nifty 500 indicates a potential emergence of strength in the coming weeks. Notably, the RS line is taking support at a multi-month rising trendline, suggesting a sustained uptrend.RS line can also be subjected to patter analysis just like the price. Pattern analysis of the RS line, similar to stocks, reveals supports, resistances, and potential breakouts. Additionally, the RSI has crossed above 30 from oversold levels, a historically bullish signal. Since 2020, each such occurrence has been followed by significant improvements in the RS of the Nifty Energy Index in subsequent weeks.

The weekly chart of the Nifty Energy Index reveals a corrective decline over the past three months. However, the Index has successfully defended its 100-week moving average, rebounding from this crucial support level. Additional technical indicators on the chart suggest that the Index may be nearing the completion of its corrective phase. The RSI is also showing a positive divergence against the price. Going forward, the Nifty Energy Index is expected to see an improvement in its valuations while also strengthening its relative performance against the broader markets.

When plotted on the Relative Rotation Graph (RRG) with the Nifty Energy Index as the benchmark, several constituents of the Index demonstrate notable improvement in their Relative Momentum. Stocks such as IOC, ONGC, Reliance, NTPC, and Coal India indicate potential signs of initiating a fresh upward move or, at the very least, nearing the conclusion of their corrective phases.

The Nifty Energy Index is exhibiting clear signs of emerging Relative Strength, indicating a likely period of relative outperformance against the broader markets in the coming days. This strengthening trend is further reflected in several key constituents of the Index, which are showing notable improvement in their individual performance metrics.

Interpreting the Current Setup on Nifty Energy Index:

While it may not be prudent to initiate aggressive buying in this space immediately, this is an opportune time to begin gradually increasing exposure. Accumulating fundamentally strong stocks within this sector can position portfolios to benefit from the potential bottoming out indicated by the emerging Relative Strength. A disciplined, incremental approach to investing in this space is recommended as the Index consolidates and builds on its improving momentum.

-Foram Chheda, CMT

ChartTalk: Spotting Potential Reversals Through RSI Divergence

ChartTalk: Spotting Potential Reversals Through RSI Divergence

by | Dec 27, 2024 | ChartTalk

The Relative Strength Index (RSI), developed by J. Welles Wilder, is a cornerstone of technical analysis and one of the most widely used tools in a technician’s toolbox. This momentum oscillator measures the speed and change of price movements, oscillating between 0 and 100, making it highly versatile for analyzing overbought and oversold conditions. Its appeal lies in its simplicity and effectiveness, offering insights into potential reversals and trend continuations by quantifying relative price strength. The RSI’s ability to pinpoint divergences and provide early signals of shifts in market sentiment cements its role as an indispensable tool for traders and analysts alike.

One of the most significant applications of the Relative Strength Index (RSI) is spotting divergences, which can signal potential trend reversals. A bullish divergence occurs when the RSI forms higher lows while the price charts lower lows, indicating weakening selling pressure and a possible upward reversal. Conversely, a bearish divergence arises when the RSI makes lower highs as prices reach higher highs, hinting at diminishing buying strength and an impending downturn. By identifying these divergences, traders can anticipate market shifts before they become evident on the price chart, enabling more timely entry and exit decisions. This early insight into potential reversals makes divergence analysis a vital tool for technical traders aiming to stay ahead of market movements.

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To spot a bullish divergence, observe the price chart for lower lows while the RSI simultaneously forms higher lows, indicating a discrepancy between price action and momentum. This suggests that selling pressure is weakening, often interpreted as a potential reversal to the upside, signaling an opportunity to consider long positions or reduce bearish exposure.

If we apply this concept to a practical application, bullish divergence will be observed in TATAMOTORS. The recent months have been challenging for the markets, and there is no difference for this stock either. From its peak above Rs. 1177 to Rs. 754, the price at which it is trading, the stock has lost a significant value from its peak. However, the last phase of the downside has come with a difference.

The most immediate phase of the decline has come with  the RSI showing bullish divergence against the price. While the price formed a lower low, the RSI did not, and this led to the emergence of a bullish RSI divergence against the price.

Does this call for an entry in this stock?

The answer to this is a “yes,” but that comes with a caveat.

The right time to enter a stock after spotting a bullish divergence is when price confirmation aligns with the RSI signal. This typically occurs when the price breaks above a key resistance level, forms a higher high or shows a reversal candlestick pattern such as a bullish engulfing or hammer. Waiting for price confirmation helps validate the divergence and reduces the risk of acting prematurely in case of false signals.

In the present case, the most ideal point of entry would come once the stock crosses above Rs. 765 and stays above that. The crossing above Rs. 765 would mean penetrating the most immediate resistance level.

An entry above the mentioned levels would mean spotting a potential trend reversal early. By combining momentum signals with price confirmation, one can better position oneself to capitalize on opportunities and manage risks effectively. However, a close below most immediate low would negate this formation.

-Foram Chheda, CMT

ChartTalk: Adding This Stock In The Portfolio For A Long Term Alpha Generation

ChartTalk: Adding This Stock In The Portfolio For A Long Term Alpha Generation

by | Nov 28, 2024 | ChartTalk

Over the past weeks, the equity markets have been under turmoil. During the whole of November, we have seen unabated FII selling. Except for two days this month, the FIIs have been net sellers in the Indian market. As of now, November has seen net FII selling to the tune of over Rs. 29800 crores. We have witnessed Nifty staging a smart technical rebound after a brief violation of the 200-DMA. However, what was seen over the past week was a painful mean reversion of the markets. At one point, Nifty traded more than 10% of its 50-week MA. Following the recent corrective decline, the index tested the 50-week MA, which is currently at 23369, and hopefully, it will complete the mean reversion process.

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Amid this turbulent corrective period, the Nifty IT Index has been resilient and relatively outperformed the broader markets. The Nifty IT index tested its fresh high this week and substantially improved its relative momentum against the broader markets. The +DI staying above the -DI and the ADX remaining above 20 represents strength in the current uptrend. The Relative Strength analysis also shows that the IT Index has reversed its long-term trajectory of relative underperformance. The RS line has reversed its long-term trajectory and is now moving higher.

Many of the IT Index components are showing strength and exhibiting the potential to generate a decent alpha against the broader markets over the coming weeks. LTTS is one such stock.

The stock formed its peak near Rs. 5762 in January 2022. Since then, the stock has been trading in a very wide range. Until today, LTTS has seen trends and counter-trend moves and found support below or at its 100-week MA. The period from January 2022 until now has seen the level of Rs. 5760 getting tested over three times. This entire price action has formed a large ascending triangle on the weekly chart.

The Ascending Triangle is an essentially bullish formation. They are known for getting resolved with the price eventually breaking out on the upside regardless of their place of formation. Going by this, the LTTS is developing a major long-term bullish pattern.

Currently, the stock trades above all key crucial moving averages. The RSI has formed a new 14-period high, which is bullish. The weekly MACD is on the cusp of a positive crossover, as evidenced by a sharply narrowing Histogram.

For investors seeking entry, the recommended buy range lies between ₹6700 and ₹6800, with a price target of around ₹8100, offering an anticipated upside of approximately 19%. To manage risk, a stop-loss can be maintained at ₹6470. In conclusion, this NBFC stock’s consolidation within a strong technical pattern, along with key support indicators and bullish signals on multiple charts, suggests a compelling buying opportunity for those looking to capitalize on the current market conditions.

LTTS stays inside the leading quadrant of the RRG. The RS line against the broader Nifty 500 index has flattened and now looks at moving higher. This is likely to ensure continued relative outperformance of the stock.

The stock has strong potential to retest Rs. 5800 level over the coming weeks. This would mean an appreciation of over 9% from its current levels.

At this stage, it is important to note that even if these expected levels are tested, LTTS would still be inside the Ascending Triangle and readying itself for a major breakout. This hints at the potential alpha that the stock can achieve over the coming months. The current technical setup makes LTTS an excellent medium to long-term inclusion in the portfolio.

-Foram Chheda, CMT

ChartTalk: Strategic Stock Selections for Diwali Mahurat 2024

ChartTalk: Strategic Stock Selections for Diwali Mahurat 2024

by | Oct 27, 2024 | ChartTalk

In this month’s edition of ChartTalk, we delve into three high-potential stocks representing key sectors within the Indian market—NBFC, IT, and Financial Services—that are poised to deliver robust returns over the next year. Each selection is the result of thorough technical analysis, identifying companies with strong momentum, sound fundamentals, and sectoral tailwinds. As we break down the strategic positioning and growth prospects for each stock, we aim to provide insights that can help investors make well-informed decisions in the months ahead.

Technical Insights on a NBFC Stock: Resilience Amid Market Correction

This NBFC stock presents an appealing investment opportunity, especially in light of the recent market correction. While the Nifty Index has declined over 8% since its September highs, this stock has experienced a sharper pullback of nearly 15% but remains within a broad consolidation range, suggesting resilience despite market pressures.

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 Technically, on the weekly chart, the stock price of Bajfinance previously reached an all-time high of ₹8050 in October 2021, followed by a correction phase that led it into a consolidation pattern. Since then, the price has been within an ascending triangle, a formation often indicative of a potential for upward movement. Over the past month, despite a 15% correction, the stock has maintained this ascending triangle pattern, signaling steady consolidation. The stock is taking support on the 200-week Moving Average (MA) and recently formed a Doji candlestick—a pattern known for signaling potential reversals—near this support, making the current levels attractive to buy.

On the daily chart, last week’s low took support on a trendline, with early signs of a rebound. This trendline support aligns with recent crossovers in the stock’s moving averages: one month ago, the 50-day MA crossed above the 100-day and 200-day MAs, reinforcing a bullish trend over both intermediate and long-term horizons. In addition, the Relative Strength Index (RSI) tested the oversold zone and has since begun moving toward a bullish territory, further validating the stock’s potential for recovery. This mix of strong support levels, bullish candlestick formations, and favorable moving average crossovers adds conviction to the bullish case for this stock.

For investors seeking entry, the recommended buy range lies between ₹6700 and ₹6800, with a price target of around ₹8100, offering an anticipated upside of approximately 19%. To manage risk, a stop-loss can be maintained at ₹6470. In conclusion, this NBFC stock’s consolidation within a strong technical pattern, along with key support indicators and bullish signals on multiple charts, suggests a compelling buying opportunity for those looking to capitalize on the current market conditions.

Bullish Breakout and Strong Momentum Signal Investment Potential

A leading IT stock has demonstrated impressive resilience and strength, outperforming both the IT sector index and the broader domestic market index. The stock’s consistent record highs highlight strong investor interest and a sustained bullish momentum.

On a weekly chart, Coforge recently broke above an upward-sloping trendline that had previously acted as resistance since 2022 ke 2022??. This breakout, following multiple failed attempts, indicates renewed buying interest and invites potential investment opportunities.

Following its peak of ₹6000 in July 2021, Coforge entered a corrective phase, finding key support above the 200-week Moving Average (MA) near ₹3220, where it established a base before gradually moving higher. The upward trend continued through the year, briefly encountering resistance near its previous high before retracing to the 200-week MA. However, in May this year, Coforge’s price structure strengthened, crossing above the 50-week and 100-week MAs. Last month, it achieved a substantial breakout above this long-standing resistance trendline, signaling a potential for further price appreciation.

This breakout on the weekly chart was accompanied by a notable increase in trading volume, underscoring the reliability of this upward movement.

On the daily chart, since forming a bottom near ₹4287 in May, Coforge has displayed a pattern of higher tops and higher bottoms, affirming a strong and sustained bullish trend. Last week, the stock re-tested the breakout level and resumed its uptrend, confirming ongoing momentum. During this re-test, it also took support on the 50-day MA, a technical reinforcement that aligns near-term, intermediate, and long-term trends positively.

Considering these technical factors, Coforge presents an attractive opportunity for investment. The recommended buying range is between ₹7600 – ₹7650, with a potential target of ₹8250, offering an approximate 8% upside. Investors are advised to maintain a stop-loss at ₹7185 to manage risk effectively. Coforge’s recent breakouts, increased volume, and supportive MA levels make it a favorable choice for investors seeking to benefit from a bullish trend in the IT sector.

A Bullish Case for Financial Services Stock as an Investment Opportunity

This leading financial services stock has shown notable resilience and strength, consistently outperforming the Nifty Index. This positive divergence from the broader market underscores strong investor sentiment and growing confidence in the stock’s potential.

 

Recently, on the weekly chart, MFSLachieved a significant technical milestone by breaking out from horizontal trendline resistance at approximately ₹1125, positioning it as an attractive buying opportunity for investors. After initially reaching a high of ₹1148 in July 2021, the stock entered a corrective phase, eventually stabilizing and forming a base of around ₹610 in May 2023. This bottoming phase laid a foundation for the stock’s gradual recovery, marked by a series of higher tops and higher bottoms, a classical indication of a strong bullish trend.

As the stock rebounded on the daily chart, it crossed above key moving averages—namely the 50-day, 100-day, and 200-day MAs—further solidifying the bullish undertone. Last month, the stock faced resistance near its prior highs but ultimately succeeded in breaking out, signaling renewed momentum.

This month, MFSL re-tested the breakout level, affirming the breakout’s validity, and resumed its upward movement. This re-test at the breakout level, followed by a continuation of the uptrend, is typically a robust technical confirmation of strength, making it an ideal setup for investors. Furthermore, the breakout was supported by an exceptional increase in volume, lending credibility to the upward move. The Relative Strength Index (RSI) also made a decisive breakout from a downward-sloping trendline, adding to the stock’s bullish outlook and signaling increasing buying interest.

In the past few trading sessions, MFSLhas been consolidating at higher levels, exhibiting strong price resilience. Last week, it broke out from this consolidation range, which added further momentum to the bullish trend. Additionally, the Parabolic SAR (PSAR) remains in a buy mode, reinforcing the buy signal across different time frames and confirming the ongoing positive trend.

Considering these strong technical indicators, MFSL presents a compelling buying opportunity. The recommended buy range is between ₹1220 and ₹1250, with a strict stop-loss at ₹1170 to manage risk effectively. A potential price target near ₹1400 offers a solid upside potential, making this stock a favorable choice for investors seeking to capitalize on momentum in the financial services sector. With the breakout confirmation, volume increase, and supportive indicators like RSI and PSAR, MFSL is well-positioned for further gains.

Foram Chheda, CMT