HDFC Ltd and HDFC Bank Trend Bullish Ahead of Merger

Housing Development Finance Corp (HDFC) Ltd and HDFC Bank, two prominent entities in the Indian financial sector, are currently showing bullish trends on the daily charts.

The merger deal date of HDFC and HDFC Bank is set for 1st July 2023, and this development has the potential to introduce volatility into the market.

Upon completion of the merger on 1 July 2023, HDFC Ltd shareholders will possess a 41% stake in HDFC Bank, following the bank's swap ratio of 25:42. This implies that for every 25 shares of HDFC Ltd, shareholders will receive 42 shares of HDFC Bank.

Both HDFC and HDFC Bank carry significant weights in benchmark indices like Nifty50, as well as sectorial indices such as Bank Nifty and FinNifty. Given their influence on these indices, the merger can impact the overall market sentiment and contribute to market volatility.

Traders should be cautious and prepared for potential fluctuations in today's session as well as Friday's session (Thursday being a holiday on account of Bakri Eid). It is advisable to trade with a strict stop-loss mechanism in place to manage risk effectively.

As we said, both companies are currently showing bullish trends on the daily charts.

In this article we will look at these charts in detail.

Dow Theory: The Bullish Structure

The Dow Theory is a widely recognised and influential principle in technical analysis developed by Charles H. Dow.

The higher high-higher low pattern, in the Dow Theory, is a strong bullish signal that suggests an upward trend in the market.

According to the Dow Theory, sustained higher highs and higher lows in price movements indicate a healthy and positive market environment.

This pattern reflects a consistent series of rising peaks and troughs, signifying increased buying pressure and a potential continuation of the upward trend.

The bullish structure is evident in the stock price of HDFC twins.

HDFC Ltd, Daily Price

 

HDFC Bank, Daily Price Chart

 

Golden Cross

Both the stocks are currently trending with a golden cross, which is bullish as per technical analysis.

The golden cross occurs when a shorter-term moving average, 50 Days Exponential Moving Average (50DEMA), crosses above a longer-term moving average, 200DEMA.

This event is seen as a positive signal indicating a potential uptrend in the stock's price. In the charts above, the 50DEMA is highlighted in blue and 200DEMA in orange is trending higher with the golden cross.

Also, the band formed by the 50DEMA and 200DEMA is acting as a significant accumulation zone.

This suggests that traders and investors are actively accumulating positions in both HDFC Ltd and HDFC Bank within this range. This further bolsteres the bullish sentiment surrounding these stocks.

The Bullish Crossover

The bullish crossover on the MACD (Moving Average Convergence Divergence) in HDFC twins provides support for the bullish sentiment in the market.

With the bullish crossover, where the MACD line crosses above the signal line, it indicates a strengthening of the upward momentum and suggests that the bulls have gained control.

This crossover reinforces the positive momentum for HDFC twins, adding to the overall bullish case for these stocks.

The Hurdles

It's worth noting that a resistance zone has been identified on the charts, marked by a redline.

These resistance levels could pose a challenge for the stocks to break through and achieve higher price levels.

Traders should closely monitor the price action around this resistance zone for potential signals of a breakout or reversal.

The Big-Bang Merger - A Threat to Momentum Traders

In addition to the technical analysis, it's important to consider the impact of merger between HDFC Ltd and HDFC Bank.

Such a merger could have significant implications for traders and investors, as it would affect the ratio between the two stocks.

Traders should remain cautious and keep this merger possibility in mind when assessing their positions and considering their trading strategies.

From a fundamental perspective though, the merger is expected to be value accretive.

HDFC has been India's leading financial institution for over two decades. The mortgage financer has incubated subsidiaries in every segment of the financial sector and allowed them to mature.

Its associate, HDFC Bank on the other hand, has offered stiff competition to not just the public sector behemoths but also larger private sector banks, like ICICI Bank.

The merger will bring consolidation in the financial sector backed by need for scale and technological investments.

The merger is a win-win for the shareholders of both HDFC Ltd and HDFC Bank. Both have complementary strengths.

HDFC Bank's higher margins can be attributed to higher CASA (low-cost deposit ratio). At the same time HDFC's lean operations allowed it to function with minimal cost to income ratio.

As both entities are known to be conservative lenders with high provision coverage ratios, the merger could be value accretive.

Conclusion

HDFC Ltd and HDFC Bank are currently exhibiting a bullish trend with a higher high-higher low structure on the daily charts.

The band formed by the 50DEMA and 200DEMA is acting as an accumulation zone. We're closely monitoring the resistance zone too.

The potential merger between HDFC Ltd and HDFC Bank is a very important factor for traders to consider.

Traders should remain vigilant, keeping these technical and fundamental aspects in mind when making trading decisions in these stocks.

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