Dalal Street Week Ahead: Market Uptrend Strong; Be selective and careful

The previous sessions for the markets were quite trending; The headline index continued with its upmove. Extending their gains, the Nifty 50 index ended the week on a very strong note. Markets also widened their trading range, witnessing strong upside momentum. The Nifty traded in a range of 393.65 points during the week and closed close to its highs making fresh highs as well as fresh closes for itself. Volatility eased slightly; India Vicks fell marginally by 1.18% to 13.39 on weekly basis. While markets rose almost relentlessly, the headline index posted a net weekly gain of 412.75 points (+1.66%).

The month also ended; Nifty recorded a monthly gain of 284.75 points (+1.14%). Markets are in a strong uptrend; However, once again a situation has developed in which they deviate sharply from their mean. This warrants a very careful approach to the markets. The nearest 20-week MA is placed at 23.659 which is 1576 below the current close. The 50-week MA placed at 22104 is 3131 points below the current level. All of these things once again point to markets deviating from their averages; This once again exposes them to highly volatile profit-taking wrangles.

This also highlights the need for vigilant protection of profits with each bounce that occurs while traveling with the trend. Monday is likely to see a steady start to the day. Levels of 25400 and 25495 are likely to act as resistance points. Support comes lower at 23900 and 23710 levels.

Weekly RSI is 75.03; It remains in mildly overbought territory. RSI is showing a bearish divergence as it did not make a new high while Nifty made a new close. The weekly MACD remains bullish and above its signal line.

A pattern analysis of the weekly chart shows that the market has taken out its immediate high of 25078; It is likely to continue the uptrend by pushing the support level higher as well. Looking at derivatives data, immediate short-term support has been stretched to 25000 levels; Any breach of this point is likely to push the markets towards a wider consolidation. Market breadth is a concern; The breadth is not as strong as it should be otherwise if such a strong trend move is underway.

Overall, there is nothing on the chart that indicates a correction in the markets. The ongoing uptrend is strong; The easiest thing to do is to keep traveling with the trend.

However, at the same time, we should not ignore the fact that markets have once again deviated significantly from their averages. It becomes more important that as we follow the trend, we do so very carefully while vigilantly guarding profits at higher levels. It would be wise to actively trail the stop-loss as it will help protect the bulk of the profit. The structure of markets is somewhat defensive; PSE, Pharma, IT, FMCG etc stocks are expected to perform well. Overall, a selective and cautious approach 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.

Relative rotation graphs (RRG) show a uniquely defensive setup. The Nifty Pharma index had moved within the leading quartile in the previous week. This week, IT and FMCG groups also entered the leading quartile. These groups with the Nifty Midcap 100 seen losing relative momentum are expected to outperform the broader Nifty 500 index.

The Nifty Consumption Index which was in the weakening quadrant is moving back to the leading quadrant. Besides, Nifty Auto, PSE and Realty indices are also within the weakening quadrant.

The Financial Services Index moved into the lagging quartile. Nifty Bank Index, Infrastructure, PSU Bank, Metal, Commodities and Energy groups are within the lagging quadrant. Among these, energy, commodities and infrastructure indices showed slight improvement in their relative momentum.

Nifty Media Index is in the improving quadrant; However, she is seen losing her momentum.

Important Note: The RRGTM chart shows 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, is a consulting technical analyst and founder of EquityResearch.asia and ChartWizard.ae and is based in Vadodara. He can be contacted here. milan.vaishnav@equityresearch.asia)

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