Dalal Street Week Ahead: Nifty not out of the woods yet; Any technical rebounds should be followed carefully

Over the past five sessions, the Nifty has mostly consolidated but has done so with bearishness. The Nifty traded within a defined range and ended the week with modest gains.
Importantly, the index also remained below its critical resistance points. Instability also expanded; India VIX rose 8.68% to 15.90 on a weekly basis. Given the series of moves by the markets, the trading range narrowed. Nifty oscillated in a 363-point range; This was much less than the previous week. Following a largely consolidated but bearish setup, the headline index closed with a modest weekly gain of 123.55 points (+0.51%).

It was a four-day trading week as there was only a symbolic formal Muhurta trading session of one hour on Friday. In the week prior to this, the Nifty had breached well below the 100-DMA which currently stands at 24669. The index also breached the 20-week MA placed at 24744. This makes the zone of 24650–24750 the highest. An important resistance area for markets. As long as Nifty remains below this zone, the markets will not see any trending and sustainable upswing. In other words, as long as the Nifty remains below this critical resistance zone, it remains vulnerable to sustained selling pressure. The most immediate support zone for Nifty is now at 23900; If this level is breached on the downside, the markets will weaken.

Global markets are expected to deliver a stronger handover; Given this, Indian markets may see a steady start to the week on Monday. Levels of 24450 and 24580 will act as immediate resistance points. Support comes at 24120 and 23900.

Weekly RSI is at 51.24; It remains neutral and shows no divergence against price. The weekly MACD is bearish and trading above the signal line.

Pattern analysis of weekly chart shows strong momentum on downsides for Nifty. 20-DMA shows a drastic decrease; It has already crossed below the 50-DMA and is about to cross below the 100-DMA as well. This indicates strong selling pressure and increases the possibility of Nifty staying in intermediate downtrend for some more time. Resistance has been pulled down; Technical rebounds, if and when they occur, will see resistance between the 24650-24750 levels.

Overall, if the Nifty has had a steady and firm start to the week, it is not out yet. Any technical rebounds, as and when they occur, should be pursued very cautiously. All upward moves will face resistance at 24600 and above; These rebounds are more likely to sell higher. It is strongly recommended that leveraged positions should be kept to a moderate level and all profits on both sides should be carefully protected. Extreme 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 Pharma, Services Sector, IT and Consumption Indices are within the leading quartile of RRG. Although a couple of them are slowing down in their respective paces, these groups are likely to outperform the broader markets relatively.

Nifty FMCG and Midcap 100 index are the only two groups in the weaker quartile; They may continue to underperform their relative performance against the broader markets.

PSU Bank Index, Realty, Infrastructure, Media, PSE, Auto, Energy and Commodities Index are within the lagging quadrant. Among these, energy, auto, PSE and media indices may underperform the broader markets.

The rest are improving their relative momentum sharply and may eventually improve their relative performance against the broader market.

The Nifty Bank, Metal and Financial Services indices are within the improving quartile and may continue to improve their relative performance against the broader markets.

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