Next Dalal Street Week: Will Nifty extend gains or re-enter consolidation?

Markets once again had a broad week; However, they ended up near its high point this time. Nifty had a series of sessions for four out of five days; On the last trading day of the week, the Nifty was seen swinging wildly before closing near its highs. The range of trade also remained wide; The index had oscillated 611 points in the previous sessions. Volatility, however, took a back seat.

The India VIX fell 7.69% to 13.05 on a weekly basis. Nifty closed a notch above its immediate resistance points; The headline index ended the week with a net weekly gain of 90.50 points (+0.37%).

The week was to end on a negative note, if the markets did not bounce higher on Friday. From a technical perspective, Nifty has resisted the 100-DMA placed at 24709 in the last few days. Following the massive rebound seen in the Nifty from the lows, the index closed a notch above this important resistance level.

Nifty has to stay above 24700 level to extend this rally. Any slippage below this point will again send the Nifty back to the wider 24400-24700 trading range. Failure to sustain above the 24700 mark will mean an extended period of consolidation for the markets. However, the longer the Nifty stays above 24700, the more likely it is to extend the rally.

Next week is expected to start quietly with levels of 24790 and 25000 acting as resistance points. Support comes at 24590 and 24400 levels. Trading ranges will continue to be wider than usual.

Weekly RSI is at 56.37; It remains neutral and shows no divergence against price. The weekly MACD is bearish and remains below its signal line.

A pattern analysis of the weekly chart shows that the Nifty faced a brutal mean reversion process. At one point the index was 16% above its 50-week MA.

During the recent sharp corrective move, the Nifty again tested this level. He then found support and made a strong technical pullback. The market’s finding support at the 50-week MA strengthened the credibility of this level as an important pattern support for the market. On the daily timeframe, the Nifty has attempted to cross above the 100-DMA level after resisting for a few days.

Markets may try to resume the technical pullback that it started by rebounding the 50-week MA level. For this to happen, it will be important for Nifty to hold its head above 24700.

It is also important to note that any slip below the 24700 level will drag the markets inside the consolidation zone.

Volatility is once again towards the lower end of its range; There is a possibility that we may see an increase in volatility in the coming week.

It is recommended that investors invest in relatively strong stocks and sectors. Instead of blindly chasing rising stocks, investments should be appropriately shifted to sectors showing strength or improvement in relative strength. While carefully securing profits at higher levels, caution is advised for the coming week.

In our look at Relative Rotation Graphs®, we compared various sectors against the CNX500 (NIFTY 500 Index), which represents more than 95% of the free float market cap of all listed stocks.

The relative rotation graphs (RRG) do not show any major change in the sectoral setup. Nifty Bank, Financial Services, Private Banks and IT indices are within the leading quartile.

These groups are likely to outperform the broader markets.

Pharma and Midcap 100 indices are in the weaker quartile. These sectors are likely to witness a sustained slowdown in their respective performance.

FMCG, energy, media, auto, energy and infrastructure indices are within the leading quartile. These groups may exhibit relative underperformance against the broader Nifty 500 index.

The PSU Bank Index continues to move firmly within the improving quadrant. Realty and metal indices are also within the improving quadrant; These groups are likely to improve their relative performance against the broader markets.

Important Note: RRG™ charts show the relative strength and momentum of a group of stocks.

In the above charts, 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, Consulting Technical Analyst and Founder of EquityResearch.asia and ChartWizard.ae is based in Vadodara. He can be contacted at milan.vaishnav@equityresearch.asia