After rising over 25%, have investors finally shown confidence in Nifty Metal?

Nifty Metal is one of the top performers lately from the sectoral indices.

When Nifty Metal lost its shine during the April-June phase, no one dared to touch it considering the strong sell-off. The index had fallen over 35% from its lifetime high of April and plunged below all the key moving averages. Falling metal prices proved detrimental to the index as investors chose to book profits in anticipation of falling revenue and profitability from metal companies. However, the fortune seems to be changing for the index as it has risen over 25% from its 52-week low in just over a month. 

So what induced this magnificent rally?

Firstly, the metal prices seem to have stabilized at lower levels. Secondly, the metals stocks have been quite oversold and thus, have seen strong value buying interest emerging at lower levels. Top steel companies like Tata Steel and JSW Steel have witnessed about a 30% upside from its oversold region. Also, the ease of lockdown in China is a likely indication of strong demand for metals, as China is the largest importer of iron and steel.

With this, the Nifty Metal index is the top performer in the past few weeks and the index has retraced about 50% of its prior downtrend. It currently trades near 200-DMA and a strong breakout above this indicator shall bring more confidence among the long-term investors.

On the monthly chart, the index has formed the bullish engulfing, which is a sign of reversal. It is in an uptrend for six consecutive weeks. Meanwhile, the technical parameters also suggest bullishness in the index. The momentum indicators like ADX (38.68) show a strong uptrend. MACD is positive and above the signal line, indicating a potential upside. The 14-period daily RSI (76.36) is in the super bullish zone and demonstrates strong strength.

Considering the momentum that the index is in right now, it has the potential to gain another 8-10 % in the short to medium term. Also, a close watch will be on the developments in China-Taiwan tensions, as this can cause a rise in commodity prices, and thus can propel the index further.