Nifty Constituents Matrix

The July series derivatives contract is scheduled to expire the coming Thursday and August series would get active (probably is already actively traded by now) going forward. Let’s start off with the seasonality factor of the Nifty in the month of August.

From the above chart, it is evident that over the past 10 years, Nifty has managed to close on a strong note in July. This year has been no different with the index having registered a gain of about 3% till date in July.

The stats for August is not encouraging though. The Nifty has lost on an average 1.8% and this has happened 56% of the time. What this means is that seasonality-wise, Nifty has tended to close on a weak note in August compared to July. Let’s have this seasonality at the back of our mind and take a look at the index heavy weights to glean more information to check the veracity of the seasonality factor.

Let’s switch-over to the performance matrix of the index constituents. This matrix captures the position of each Nifty stock across four box sizes in the Point & Figure Chart. I have used 0.25%, 0.5%, 0.75% and 1% for calculation. This is akin to watching a chart across four different time frames with 0.25% box-size being the smallest and 1% being the highest time-frame in our example.

A stock gets a maximum ranking of 2 if it is in a buy-mode and also in a column of “X”. A stock would get a rank of 1 if it is in a buy-mode but in a column of ‘O”. It would get a rank of -2 & -1 at the other end of the spectrum. So a score of 2 would mean best bullish configuration and -2 is max bearish configuration.

If you read the score for the individual stock, it would give you an idea of how strong the stock is across different time frames. If you look at the total at the bottom of each box-size, it would reflect the overall health of the Nifty across different time frames. Hope you get the logic.

If you look at the table above, the score for the 1% column (highest time frame) is 59 and it drops steadily as we read from right to left. What this means is that the performance of index constituents is deteriorating in the lower time frame. This is corroborated by the range bound nature of Nifty in the recent weeks.

Even in the 1% column, the total score is 59 out of the max possible score of 100. This is not a healthy sign either. If you look at the stocks highlighted in the yellow-band (the ones having significant weightage in the Nifty), not many have the max-score of 8 if you add up the points across the 4 time frames.

In the 0.25% column, most of them have either triggered a sell signal and gotten to a score of -2 or have turned to 1 which means they are in the column of “O”. The indication is that they are in a correction within uptrend.

HDFC Bank and Tata Motors are the ones that are very strong across all time frames from the index heavy-weights basket. Talking of other heavyweights, Infosys is in a sell mode and under-performing the Nifty. Axis Bank, after the poor earnings reported on Friday, in all probability would trigger a sell signal in at least 0.25% box size and if this spills over to other box sizes, then it could affect Nifty & Bank Nifty sentiment.

The focus this week would be on key heavy-weights and relatively strong stocks such as HDFC, ITC and Reliance. A sell signal in these stocks would drag the Nifty in a big way. On the contrary, a rally could have a beneficial impact.

ICICI Bank, another key index heavyweight, is in a sell mode in 0.25% and 0.5% box sizes. If this spills over to the other time frame, there would be additional pressure on the Nifty.

So, except for HDFC Bank and Tata Motors, other index heavyweights look vulnerable to further decline and drag the Nifty lower. Given this backdrop, there is little reason, from a short term perspective, to be very bullish on the Nifty. It is likely to remain range bound or drift lower. I would watch HDFC, ITC and Reliance for early clues about the Nifty direction. Given the seasonality factor, I would expect a fall or correction in these stocks, resulting in a correction in the Nifty.

Hope the Matrix gives an overall picture about the trend. The matrix table was created using the TradePoint software developed by www.Definedge.com