Dalal Street week ahead: Jittery start likely, sectoral rotation possible

The market action during the week gone by was largely on the anticipated lines. In our previous weekly note, we had mentioned that the market was firmly placed, but at the same time looked overstretched on the short-term charts. It was also mentioned in that note that in case of any bounce, Nifty will face stiff resistance at higher levels.

In line with that analysis, Nifty faced resistance at the 12,000 level through the week. The index faced strong resistance near this point and saw sharp correction from there. Despite seeing a technical pullback on Friday, the headline index ended the week with a net loss of 151.75 points, or 1.27 per cent, on a weekly basis.

From a technical perspective, this corrective move is an important development. This has made the 12,000 level an intermediate top for the market in the near term. This has also pushed the market into a broad consolidation range with the 10,936-11,099 zone acting as one of the most important pattern support. for Nifty. This zone is made up of the 50-week moving average at 10,936 and 100-week moving average at 11,099.

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Volatility, which had spiked 11.06% during the week before this one, surged another 6.21% to 21.65 level this week.

The start to the new week is likely to be jittery this time. The 11,880 and 11,950 levels will act as key resistance while supports will come in at 11,600 and 11,510 levels. The trading range in the coming week is likely to stay higher than usual given the current technical setup on the charts.

The weekly RSI stood at 60.63. It remains neutral and does not show any divergence against the price. The weekly MACD remains bullish and trades above the signal line. A black body occurred on the candles. The body of the current candle has not extended itself near the half-way point of the previous week’s candle and avoided creating a classic Dark Cloud Cover, as expected. That reflects the bearish undertone of the week.

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Pattern analysis showed the index is back inside the channel again. This channel was violated when Nifty broke down from that channel. Now, with it coming back inside that channel again, ideally speaking, the lower trend line of that channel should play out as near-term support.

Overall, the market has formed an intermediate top near 12,000 level and the market will find it difficult to move past this level too soon. The current move has pushed the market into a broad consolidation range with the zone between 50-week and 100-week moving averages becoming major supports going ahead. We cannot rule out intermittent technical pullbacks, but all moves on the upside may trigger bouts of profit taking at higher levels.

There are possibilities of some tactical shift among the sectors as well in the weeks to come. We recommend keeping purchases less aggressive. It would be rewarding to stick to defensives and staying highly stock-specific.

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In our look at Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 index), which represents over 95% of the free float market-cap of all the listed stocks. A review of the Relative Rotation Graphs (RRG) showed despite the start of relative outperformance in the financial stocks, PSU banks are yet to show any good performance and have not improved on their relative momentum yet.

Nifty Auto, IT, Media and Metal indices remain in the leading quadrant. However, except for the IT and Media packs, the Metals and Auto packs are seen sharply paring their relative momentum. These groups may post relative outperformance against the broader market, while the Metals and Auto packs may contribute less compared with the IT and Media groups.

Nifty Pharma is in the weakening quadrant. After an improvement in momentum, it appears to be taking a breather and moving towards the lagging quadrant. The commodities groups have taken a U-turn for the negative and entered the lagging quadrant. Nifty Energy, Consumption, FMCG, Infrastructure and PSE groups are in the lagging quadrant. Except for the consumption pack, which is showing some improvement in its relative momentum, the rest continues to languish in the lagging quadrant. They may collectively underperform the broader Nifty500 index, except for some stock-specific show from the consumption group.

Nifty Realty, Bank Nifty, Financial Services and Services sector indices are in the improving quadrant. They may continue to show a better performance and resilience going ahead. Nifty PSU Bank Index is also in the improving quadrant. However, is it losing momentum sharply and is on the verge of pushing itself inside the lagging quadrant once again.

Important Note: RRG™ charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance against the Nifty500 Index (broader markets) and should not be used directly as buy or sell signals.

(Milan Vaishnav, CMT, MSTA is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)



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