Technical Analysis of Nifty 50- Trends, Patterns and Indicators

In this article, we will discuss

• Nifty 50: A Detailed Overview
• What Is Technical Analysis?
• Key Aspects of Technical Analysis
• How to Carry out Technical Analysis of Nifty 50?
• Major Technical Indicators for Nifty 50 Analysis
• Use the Samco App for Next-Gen Technical Analysis
• Conclusion
• FAQs

Nifty 50 is the flagship index of the National Stock Exchange (NSE) and comprises the top 50 stocks on the exchange. The higher a company is on this index, the larger it is in terms of market capitalisation. To analyse this stock market index, you have to first check the daily Nifty 50 chart and look for the opening, high and closing prices. But for more in-depth data, you will need to understand technical analysis of the charts. In the following sections, we will cover everything to know regarding the trends, patterns and indicators used to study the Nifty 50 index.

Nifty 50: A Detailed Overview

As mentioned above, Nifty is a leading stock index that ranks the top 50 Indian companies in terms of their free-float market capitalisation. In other words, 50 of the largest and most reputable companies in this country make up Nifty 50. As of 30th September 2022, the index represents 62% of the entire free-float market cap of NSE. Along with Sensex (an index of 30 companies on the Bombay Stock Exchange), Nifty 50 is the most referenced barometer of India's stock market. A change in this index reflects similar changes in Indian markets. For instance, the Nifty 50 rises when the overall market improves and vice versa. Companies on Nifty 50 typically show high revenue growth, strong financials, a competitive edge and a growing market presence. Reliance Industries, Infosys, ICICI Bank, HDFC Bank, ITC, TCS, Bajaj Finance, etc., are some of the top companies on this index. Now that we have learnt about the Nifty 50 index let’s understand how technical analysis works.

What Is Technical Analysis?

Technical analysis is the study of the historical performance of a stock, an index or security to understand patterns and market trends. It involves the usage of chart patterns, statistical figures and various indicators to evaluate asset prices and identify trading signals. When it comes to the price movement of stocks and indices, sometimes it moves up or down. But over time, certain patterns are known to emerge. Technical analysts believe that past trading activity and trends emerging from it are reliable indicators of a security’s future prices. This theory can be used on any security that has historical data available. This includes stocks, fixed-income instruments, futures, options, commodities, currencies and market indices.

Key Aspects of Technical Analysis

Technical analysis is based on the principle that a given security or index's price reflects all publicly available information and market sentiment. That is, traders study price movements, trading volume and implied volatility as it helps to generate trading signals they can use to their benefit. Most of the theory behind technical analysis was introduced by Charles Dow in the late 19 th century. The Dow Theory lays these principles based on which traders carry out technical analysis:

• History Repeats Itself: Investor behaviour tends to repeat itself as psychology remains a predictable factor.
• Everything Is Discounted by the Market: Everything from the company’s financial information to insider trading is reflected in the price of a given security.
• Prices Have Trends: As investors and traders have predictable behaviour, patterns in the market tend to follow past trends.

Traders use technical analysis to identify opportunities in the market and capitalise on them based on certain various proven strategies.

How to Carry out Technical Analysis of Nifty 50?

The following step-by-step guide details everything you need to know to carry out a technical analysis of Nifty 50:

Step 1: Studying Nifty Charts

Basic charts are used for studying price changes and candlestick patterns of stocks and other financial instruments. The open-high-low-close (OHLC) chart is one of the first things a trader should learn to analyse. These charts provide the following information:

• Open - Nifty price when the market opens
• High- Highest Nifty price in a given trading session
• Low- Lowest Nifty price in a given trading session
• Close- Nifty price at the end of the trading hours

It is advisable to combine these charts with line charts and column charts for a more detailed analysis.

Step 2: Candlestick Charts

Candlestick charts are formed by unique trading patterns called candlesticks. These consist of coloured (red/green) rectangles with a line on the top and bottom resembling the wicks of a candle. Each rectangle represents the range of open and close prices, while the top and bottom wicks represent the highest and lowest price of Nifty 50 within a given day. A group of two or more candles make unique chart patterns called candlestick patterns. These patterns make it easy for traders to identify powerful trading signals and make decisions based on them. Candlestick charts are great for tracking current price movements.

Step 3: Identifying Uptrends and Downtrends

Once you know the parts of an index chart, it’s time to identify trends. First, you will want to take a look at the direction of Nifty 50 . There are three directions in which prices can move. If the prices are moving upward with higher highs and higher lows, Nifty 50 will be on an uptrend. If it's moving downwards with lower highs and lower lows, Nifty 50 will experience a downtrend. If the price is constantly moving up and down, they are in a sideways trend. You will need to look at the price movement over a specific time frame and check for patterns and cyclical activity. If you find any consistent trend, it will likely continue till there’s a change in investor behaviour.

Step 4:  Identifying Support and Resistance Levels

The next step is to identify the support and resistance levels of the Nifty 50 index to understand whether its current trend will continue or reverse. The support and resistance are certain price points on the Nifty chart that indicate the current market sentiment. The support level is a price point below which the price of the asset is unlikely to fall. It is always located at a point below the current market price. Resistance refers to a price point beyond which the asset price will likely not increase. It’s always located above the current market price. This is the point where the maximum supply is expected for a stock/index, increasing the selling pressure on buyers. Both support and resistance levels indicate a trend reversal. They either result in a breakout where the price moves beyond support or resistance levels or a breakdown where prices move sideways without breaking the support or resistance levels. Traders should know that support and resistant lines are indicative and only provide a probability of such events occurring.

Step 5: Volume Analysis

Volume plays an essential role in technical analysis; every trader should do volume analysis as it confirms signals for price movements. Trading volume for Nifty 50 refers to how many shares listed in the index are being bought and sold. A higher volume means a higher trading activity. Traders use volume data together with price analysis and volume trends to get meaningful information. The following table shows how changes in volume affect Nifty 50 trends:

Step 6: Analysing the Data with Technical Indicators

When you look at a Nifty 50 chart, you will notice several lines running over it. These are technical indicators used by traders and investors to analyse historical data. Indicators are independent trading systems which provide technical data which traders can use to arrive at a decision. When used with chart patterns, volume analysis and price actions, they allow traders to determine entry, exit or trade management points. Technical indicators can be broadly categorised into volume, momentum, trend and volatility indicators.

Major Technical Indicators for Nifty 50 Analysis

Given below are some of the most widely used technical indicators for analysing Nifty 50 charts:

• Moving Averages: Moving averages (MA) are simply the average price of a stock/index over several periods; for instance, 5, 10, 20, 50 and 100 days. The MA indicator helps to identify the direction of a price trend over a specific time frame as well as trend reversals.

• RSI: Relative Strength Index (RSI) is a momentum indicator with a value of 1 to 100. It uses the data of recent gains and losses to form an oscillator that helps traders identify overbought or oversold conditions. This acts as a warning signal for large-scale price movements on Nifty 50 .

• MACD: Moving Average Convergence Divergence or MACD indicator is a momentum oscillator that uses two exponential MAs to create a MACD line and a signal line. When the MACD line crosses the other line below it, it signals falling prices. When it crosses the signal line above, it indicates rising prices.

• Stochastic Oscillator: It's a momentum indicator that compares the closing price of the asset (Nifty 50) to its price ranges over time. It provides a value between 0 and 100, with 20 showing signs of an oversold market and 80 being an overbought market.

• ADX: Average Directional Index (ADX) is a trend-following indicator used for measuring a trend’s direction and strength. The larger the value, the stronger the trend and vice versa.

• ATR: Average True Range (ATR) is a volatility indicator that shows traders the average range of price swings over a certain period. It is derived by calculating the moving average for 14 days. If ATR for Nifty 50 is high, it means that the index has high volatility.

• ROC: Rate of Change (ROC) is a momentum oscillator that measures changes between the current price and several historical prices. This indicator is plotted against zero, with positive ROC indicating an uptrend and vice versa.

• %R: Williams Percent Range (%R) is a volatility indicator used to analyse the magnitude of the recent price action of a security or index. It's calculated by subtracting an asset's low price from its high price. This result is between 0 and 100%. A higher percentage shows an increase in buy orders on Nifty 50 .

• CCI: Commodity Channel Index (CCI) is a momentum oscillator that measures the difference between an asset’s current price and historical average price. It helps to determine if the asset is becoming overbought or oversold.

• Bull/Bear Power: This is an oscillator that measures the total power of bulls and bears in the market to change an asset or an index's price in their favour. The baseline for this indicator is a 13-day exponential moving average (EMA).

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Conclusion

Technical analysis utilises past records of a security or an index to recognise patterns and trends for future use. With a record of over 27 years, Nifty 50 provides a lot of information and patterns that experienced traders can use to their advantage. The above sections have detailed all the Nifty 50 trends, patterns and indicators you should learn about before trading. Remember that technical analysis only provides predictions and signals; proper risk management is necessary to minimise losses.

FAQs

• What are the main principles behind technical analysis?

The core tenet of technical analysis is that the market takes into account all available information when deciding on the price of securities. The 2nd principle behind it is that investor behaviour tends to follow a noticeable pattern.

• Why is volume important in technical analysis?

Checking the volume is essential for traders as it confirms the direction and momentum of the price movement of a security. It’s an indicator of market strength; trends backed by an increase in volume are more likely to happen.

• What are the different ways to trade indices like Nifty 50?

Index futures and options provide an easy way for anyone to trade Nifty 50 without directly purchasing its underlying stocks. You can speculate long or short with Nifty futures or use call or put options on Nifty 50.

• Which stocks are eligible to be listed in Nifty 50?

Only stocks that have been listed on the NSE for at least six months (1 month for an IPO) can be listed on Nifty 50 if they rank among the top 50 companies. These shares should be available for the general public and in the F&O segment and have sufficient liquidity.

•  How to invest in a Nifty 50 index fund?

You can invest in a Nifty 50 index fund directly from an AMC’s (Asset Management Company) website or through an online brokerage platform like Samco. You will need to complete your KYC, and then you can select an index fund to invest in.