Tata Steel, SAIL: Will metal stocks correct further? Here's what charts say

If Tata Steel's stock does not recover the gap-down range, the downside bias may drag it towards Rs 1040 levels.

The breathtaking rally in metal stocks, ever since the global economies began lifting restrictions amid dip in Covid-19 cases, seems to have hit a temporary blip. Valuations appear stretched for most stocks as the Nifty Metal index has clocked a gigantic 237 per cent rally (since March 2020 lows) on the National Stock Exchange as against a 95 per cent leap in the benchmark Nifty50 index, ACE Equity data show.

The rally in commodity prices, which pushed stock prices higher at the bourses, was driven by quick rise in business confidence to levels higher than pre-pandemic, reflecting the impact of large stimulus and improving prospects of the manufacturing sector.  

However, the long term business cycle indicators for OECD countries (Organisation for Economic Co-operation and Development) and pricing power of manufacturing sector in developed economies (US) suggest a significant divergence and disconnect, analysts believe. "Lately, Chinese steel prices are correcting in response to slowing construction activities amid rising construction costs. These can have a cascading impact on the metals pack," said a report by JM Financial. 

Furthermore, China -- the biggest importer of metal-based raw material -- has called for tougher oversight of commodity markets in a bid to protect consumers from soaring prices.

This, coupled with the rising cost and inflation pressures, can slow growth and consumption, the brokerage report said. "There can also be supply responses to steep rise in commodity or input prices. Both these will cool off the commodity rally," it added.

At the bourses, investor seem to be discounting the newsflow. The Nifty Metal index has tanked 8 per cent over the past two week as against a 2 per cent gain in the benchmark index. Individually, Jindal Steel, Steel Authority of India, Tata Steel, National Aluminum Company, and JSW Steel have skidded between 10 per cent and 19 per cent during the period. 

Against this backdrop, how should you trade related stocks? Here's a chart check:

NIFTY METAL

Likely target: 5,370 (provided 4,960 is held firmly)

Upside potential: 4%

The index has witnessed selling pressure in the overbought category of the Relative Strength Index (RSI), as per the daily chart. This weakness resulted in a gap-down close last week, indicating continuation of the negative sentiment. However, until the support of 4,960 is held, the upside bias may see some recovery in the upcoming sessions. The index needs to actively breakout above 5,370-mark to rally towards 5,500 levels.  CLICK HERE FOR THE CHART
 
TATA STEEL LTD (TATASTEEL)

Likely target: Rs 1,040 (downside bias until the gap down range is not crossed)

Downside potential: 7%

The stock has seen profit booking in the overbought category of RSI and the weakness has gotten deeper with a recent gap-down in the range of Rs 1,158 to Rs 1,135 levels. Going ahead, till the stock does not cover the gap-down range, the downside bias may drag the stock towards Rs 1040 levels. On the upside, the next breakout is above Rs 1,200-mark, as per the daily chart. CLICK HERE FOR THE CHART
 
JSW STEEL Ltd (JSWSTEEL)

Likely target: Rs 720

Upside potential: 1.80%

The gap-down below Rs 750 has dented the upside bias for this stock, as per the daily chart. This downside has a closing basis support at Rs 670 levels and till this support is held, the stock may keep attempting to cross the resistance of Rs 720. The breakout above the resistance, however, needs support of volume-based buying for further upside. CLICK HERE FOR THE CHART
 
VEDANTA LTD (VEDL)

Likely target: Rs 290 and Rs 297 (after crossing Rs 282)

Upside potential: 2.84% - 5.32%

The stock is attempting to conquer the trendline resistance of Rs 282 levels. If that happens, the upside bias may breakout towards Rs 290 and Rs 297 mark, as per the daily chart. Also, it is well placed above the closing basis support of Rs 270 mark, which improves the overall bias. Only a decisive breach below Rs 270 may dismantle the positive sentiment. CLICK HERE FOR THE CHART
 
STEEL AUTHORITY OF INDIA (SAIL)

Likely target: Rs 135

Upside potential: 6%

After the gap-down and a negative crossover of RSI, the stock has seen a decline from Rs 150 levels. This move has built hurdle around Rs 135 levels now, which the counter is now attempting to cross at current momentum. The support comes at Rs 115 and Rs 105 levels. CLICK HERE FOR THE CHART
 
JINDAL STEEL & POWER (JINDALSTEL)

Likely target: Rs 370 (only after breaking Rs 390 levels)

Downside potential: 5%

The two gap downs have negated any likely upside sentiment in this stock for upcoming sessions, as per the daily chart. The stock is expected to face resistance, placed at Rs 420, Rs 460 and Rs 490 levels, on every upside move. Further, a breach below Rs 390 may see a downside move towards Rs 370 levels with technical indicators converging in a negative crossover. CLICK HERE FOR THE CHART