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Dalal Street week ahead: Action shifts to midcaps, smallcaps; larger peers may halt now

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After taking a breather in the week before, the domestic equity market resumed its up-move and posted incremental gains once again during the week gone by. In last five days, Nifty experienced oscillations in a range that was close to its normal trading breadth.

At the same time, Nifty also faced resistance at a few crucial levels on both daily and weekly timeframe charts. After moving in a 350-point wide trading range, the headline index ended with net weekly gain of 193 points, or 1.73 per cent.

As we approach a new week, we need to take a note of few important points and levels before deciding how to navigate the market over the next few days. On the daily timeframe chart, Nifty is yet to navigate and fill the gap in the 11,430-11,500 zone, created at the very start of the February-March decline.

Also, the previous week’s high of 11,460 is where Nifty has faced resistance; that’s where it had broken the lower trend line of the channel it has been moving in. This makes the 11,430-11,500 zone very crucial for the coming days.

Volatility continued to decline, with INDIA VIX dipping by a further 8.01 per cent to 19.94 level, taking it to its lowest levels in the recent past.

In such a technical setup, we expect the 11,460 and 11,595 levels to act as immediate resistance points. Supports will come in at 11,280 and 11,135 levels.

Y23ET CONTRIBUTORS

The weekly Relative Strength Index, or RSI, stood at 61.47. It has marked a fresh 14-period high, which is a bullish signal. The RSI, however, remains neutral and does not show any divergence against price.

The weekly MACD remains bullish and trades above the Signal Line. However, the slope of the Histogram shows a deceleration in momentum. No significant formation was noticed on the candles.

Pattern analysis across timeframes would be required as the current levels are important on the daily as well as weekly charts. On the weekly charts, the index has faced resistance at the lower trend line of the channel that Nifty had violated when it starting to decline. On the shorter daily timeframe chart, the 11,430-11,500 zone represents the gap that was created during in this time period.

Y24ET CONTRIBUTORS

On the technical front, a rebound in the US Dollar Index and Nifty reacting to the critical zone at 11,430-11,500 are two important factors that can affect the way we approach the market. The midcap universe has started outperforming the frontline index over the past few days. This indicates that not only will the midcaps continue to fare better than the index stocks on a relative basis, but it also points towards the possibility of the benchmark indices taking some breather.

Investors and traders can follow the up-moves by strictly guarding profits at current and higher levels as sharply falling volatility remains another big worry

In our look at Relative Rotation Graphs(R), we compared various sectors against CNX500

(Nifty500 Index), which represents over 95% of the free float market-cap of all the listed stocks.

The review of Relative Rotation Graphs (RRG) showed higher chances of the bulk of outperformance coming in from the broader market.

Y25ET CONTRIBUTORS

Nifty Metal Index has moved in the leading quadrant and is firmly placed to relatively outperform the broader Nifty500 index over the coming week. Along with that, Nifty Auto and IT indices are in the leading quadrant. Importantly, the Smallcap Index among other broader indices has moved in the leading quadrant. Nifty MidCap100 index is rotating in the north-easterly direction, but it is currently positioned in the improving quadrant. These groups are likely to relatively outperform the broader market.

Other groups that are likely to put in a resilient show are the Bank Nifty, PSU Banks, Media and Realty groups as they are positioned in the improving quadrant.

Nifty Energy Index continues to slip southward in the weakening quadrant along with the Infrastructure group. Nifty FMCG and Consumption packs are also drifting further down in the lagging quadrant. No outperformance is expected from these groups on relative terms.

Important Note: RRGTM charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance against 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 [email protected])

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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