Spotting bounce-back candidates from oversold zone in technical charts

The Indian stock market has entered a highly volatile territory after a sharp slide during the last few trading sessions, just weeks after testing a previous peak in January. The rise in crude oil prices due to the Russia-Ukraine war and its likely impact on the Indian economy, coupled with impending rate hikes, has spooked investors.

The benchmark indices slid again in the first trading session on Tuesday only to bounce back to close the day with gains. While many market pundits are seeing a bottom for the slide in prices, few do consider this as a ‘dead cat bounce’ that may give a false comfort level for investors to pump in cash.

Indeed, the results of the state elections that would be declared on Thursday may give a better directional call for the market. However, the war in Europe would continue to be a risk factor as it could lead to a sharp run-up in oil prices and have a damaging impact on the manufacturing sector, consumer demand and on inflation.

We sought to identify a few potential bounce-back candidates given their positions on the technical charts.

In particular, we considered the Money Flow Index (MFI), which is a technical oscillator that incorporates both the share price and traded volume data for placing companies in the overbought or oversold baskets.

The index can also potentially help an investor to identify divergences that could be hinting at a change of trend in price. The index figures vary between 0 and 100. anything below 20 could be used as a measure to pick bounce-back candidates.

Since the MFI uses both price and traded volume data, it is also called volume-weighted Relative Strength Index (RSI) as against the conventional technical measure that uses only price.

Overall, we get around 432 stocks that could be up for a bounce back.

If we look at the large-cap space with market valuation of over Rs 20,000 crore, a dozen stocks meet the mark. These include large FMCG firms Hindustan Unilever, Nestle India and Britannia. This list also includes cement major UltraTech, Berger Paints, which has interests in Russia, United Breweries, Au Small Finance Bank, Bharat Forge, Dalmia Bharat, 3M India, Syngene International and Dr Lal Pathlabs.

In the mid-cap basket, too, there are a dozen stocks that pass the filter. These include JK Cement, Endurance Tech, Carborundum Universal, KEC International, Manappuram Finance, ITI, Procter & Gamble Health, EID Parry (India), Indigo Paints, V Mart Retail, Jubilant Pharmova and Garware Technical Fibres. All these stocks command a market valuation of Rs 5,000-20,000 crore.

Lower down still, the small-cap space dominates the list of companies in the oversold zone that fit in with the oscillator range for MFI. Filtering that list to those with a market cap of Rs 1,000 crore or more throws companies like Olectra Greentech, Barbeque-Nation, Varroc Engineering, Heidelberg Cement, Greenlam Industries, IRB InvIT Fund, Fino Payments Bank, Tide Water Oil, Agro Tech Foods, Karnataka Bank, TVS Srichakra, PG Electroplast, Patel Engineering and Cantabil Retail.

A few notches down in the pack of companies with a market cap of Rs 500-1,000 crore there are six more names: Ultramarine & Pigments, Foseco India, Cheviot Company, Parsvnath Developers, HLV, Radhe Developers and Lancer Container.