• : December 25, 2020
  • : B. Krishnakumar
 
How reliable is the recent recovery?
 
The recent recovery in the stock market has taken quite a few by surprise. This being the case, it is highly likely that not many would have participated in the rally. Whether this rally is justified based on fundamentals is not something we should be worried about. Let us leave that job to the “analyst” community.

Our job as traders or chart-based investors is to participate in the trend and the focus is to make money and not worry about the cause or the justification of the trend. Let us do an exercise to find out how broad based this rally is.

We can use the PF-X% Breadth Indicator and P&F DT-Percent breadth indicators of the Nifty 450 stocks to find out if the broader universe is participating or not. The Nifty 450 stocks represents the stocks from Nifty 500 index minus the Nifty 50 index stocks.

The PF-X% breadth indicator for the Nifty 450 universe is in the overbought zone in the 1% and 5% box size. You may wonder why 5% box size. Just understand the logic here. If a stock is in a column of X in 5% box size, it indicates that there has been a column reversal and a rally of at least 15% from the lows.

The breadth indicator in 5% box size is at 79% which indicates close to 355 stocks out of the 450 has seen a bounce of at least 15% from their lows. This is a healthy sign and indicates that the buying interest is percolating to the broader universe.

Let us also take a look at another breadth indicator P&F-DT Percent which would give more insights about the quality of the recovery in the Nifty 450 universe.

The P&F-DT% in 0.25% box size for the Nifty 450 universe is currently at 63% and had touched a high of 81% a few days ago. This indicates that a double-top buy signal has been triggered in majority of the stocks from the universe which again is a healthy sign. If you consider both the breadth indicators, we get a clear picture that a majority of the stocks have registered a rally of at least 15% and in the process a double-top buy too has been triggered.

So, we can conclude that not only we have a healthy recovery from the lows (represented by the PF-X% Indicator), we also know that the rally was not just a bounce but it ended up triggering a buy signal as well.

To dig further into the nature of the recent rally, I had a look at the “Set-Up” in the 0.25% box size for this Nifty 450 universe. The idea is to find out how many stocks are trading above the moving average with a double top buy signal in place.

To assess this, I used the “P&F Set-up Scanner” and it indicates that close to 73% of the stocks have a bullish set-up. The broad conclusion now is that not only do we have a strong broad based rally, we also have a situation where the rally has triggered a double top buy and pushed the price above their 10- column moving average.

So, it is very apparent that the recent rally is not confined to a handful of stocks from the Nifty 50 basket. A broad-based buying is evident from the statistics discussed above. Let us not worry if the rally is justified and rather focus on how to make money from it.

Before concluding, let me direct your attention tothe Sector Matrix screenshot featured below. I have sorted this table on the RS Ranking Score. If you notice, there are 12 sectoral indices that are outperforming the Nifty 50 index which is a healthy sign. This means more than 60% of the sectoral indices are outperforming the Nifty 50.

In fact, the number of indices outperforming the Nifty 50 index has been improving week-after-week, suggesting that the rally is percolating to other sectors and stocks.

If you also look at the above table, the defensive sectors such as FMCG & Pharma have slipped below the Nifty 50 index suggesting that they are underperforming in the past few sessions. On the other hand, cyclical and economy related sectors such as Auto, metals, infra and commodities have recovered. This is a subtle hint that the risk-on scenario is playing out.

Sector wise, the Nifty Auto index looks very promising. We will discuss more sectors and stocks in the forthcoming weeks.

For now, let us depart with a conclusion that the recent rally is not only broad-based, but the quality of the rally is strong too. Let us focus on identifying stocks and sectors and try to participate in the rally rather than worrying about if the rally is justified.

As always, have an exit plan just in case we are proven wrong. My line in the sand for long positions is 8,800 in the Nifty 50 index. This is recent mini bottom in the daily chart and I would abandon bullish thoughts if this low is breached.