Dalal Street Week Ahead: Nifty lacking momentum to go higher; stay cautious

The week gone by remained largely uneventful for the markets, as they traded in a narrow range and consolidated. The trading range remained narrow compared with that in the previous weeks. Nifty moved in a band of just 235-odd points, while showing lack of conviction on either direction.

The buoyancy was questioned many times at higher levels, but at the same time, Nifty showed resilience as there were weakness on the global landscape. Nifty did make a higher top and a higher bottom during the week, but ended on a flat note. The headline index ended with a net gain of 40.50 points, or 0.35 per cent, on a weekly basis.

The week gone by did not see any major directional move on the either side. This ensured that Nifty remains above its crucial support zone at the 50-week and 100-week moving averages. These MAs are in close proximity to each other and are currently placed at 10,942 and 11,057 levels. In case of any adverse trade setup, the 10,940-11,050 zone will represent a strong support area for Nifty. Upsides in the coming week will continue to remain capped, as the index lacks the momentum it needs to surge higher, and remains precarious from a pattern analysis point of view.

India VIX came off 3.22 per cent to 2.05 on a weekly basis. The week ahead is likely to see a quiet start to trade. The 11,595 and 11,680 levels will act as key resistance points, while supports will come in at 11,310 and 11,235 levels. Upside for the market may remain capped. However, any corrective pressure may make the trading range a bit wider than usual.

The weekly RSI stood at 60.90; it remains neutral and does not show any divergence against price. The weekly MACD is bullish and trades above the signal line. The slope of the Histogram is declining slowly, which shows a decelerating momentum over the past few weeks. A Spinning Top emerged on the candles. This essentially happens due to indecisive behaviour of market participants and may act as a point of potential trend reversal.

That would need a confirmation on the next bar, though. Pattern analysis reveals a cautious picture. A large Bearish Engulfing Candle had emerged two weeks back. The high of that candle faced resistance exactly at the falling trend line that joins the subsequent lower tops. This week, the formation of a Spinning Top has the potential to temporarily disrupt the moves. The index trades above all key moving averages and the 10,940-11,050 zone represents an important pattern support for the Index.

Overall, the coming week warrants a cautious approach in chasing any kind of momentum on the upside. Upsides will continue to stay capped, while downward pressures may either stay volatile or a bit extended. In any case, it would be prudent not to remain stock-specific but favour defensives compared with high-beta stocks, unless that position is highly stock specific. We recommend a highly cautious view for the week ahead.

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.

A review of the Relative Rotation Graphs (RRG) did not show any major change on the sectoral landscape. The broader market will continue to outperform as the Nifty CAP100 TRI index stays firm in the leading quadrant. Nifty IT, Auto, Metals and Media groups are also in the leading quadrant. Nifty Commodities has made a U-turn back inside the leading quadrant again. All these groups are set to relatively outperform the broader Nifty500 Index.

Nifty Energy is in the weakening quadrant as it Nifty Pharma index, but it has arrested the loss of momentum and is seen moving higher within the quadrant. This may cause the pharma index to put up an extremely resilient show.

The FMCG and consumption packs continue to languish in the lagging quadrant; the consumption index shows some signs of improvement in relative momentum.

The Nifty PSE group is in the lagging quadrant and may relatively underperform the broader market. The Realty index stays firm in the improving quadrant. The Financial Services, Bank Nifty and PSU Bank Indices are also in the improving quadrant, but appear to be rotating negatively while sharply paring their relative momentum. This may cause their relative underperformance to persist for some more time.

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 market) 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])