Dalal Street Week Ahead: Nifty’s Bear Trap? Why this decline may be a buying opportunity

After staying in the green following a sharp rebound the week before this, markets finally turned to selling pressure after failing to break above critical resistance levels. Nifty has been under strong selling pressure in the last five

Violated sessions and key support levels on the daily chart. The range remained wide on expected lines; The Nifty had traded in a wide range of 1,243 points in the previous days.

Volatility also increased; India VIX rose 15.48% to 15.07 on weekly basis. Following the weak performance, the headline index closed with a weekly loss of 1,180.80 points (-4.77%). Over the past few days, the Nifty has shown several technical events indicating the importance of some key levels.

The index resisted the 100-DMA for several days and

20-week MA for some time; This highlights the importance of these levels as key resistance points for markets. In the process, the Nifty closed below the key 200-DMA, pulling down the resistance point at 23,834. Also in Nifty

It closed a notch above the crucial 50-week MA level at 23,530. When this level was tested before, the markets bounced. Nifty’s behavior against the 50-week MA level will set the course not only for the coming week but also for the near term.

Next week is cut off with the Christmas holiday on Wednesday. Expect to start the week on Monday; The levels of 23,750 and 23,830 will act as potential resistance points. Support comes at 23,500 and 23,285 levels on the downside.

Weekly RSI is 44.41; It remains neutral and shows no divergence against price. The weekly MACD is bearish and remains below its signal line. A widening histogram indicates rapid downside momentum. A large black candle forming at the 20-week MA adds credibility to this level as a key resistance area for markets.

Pattern analysis of the weekly chart shows that after completing the painful mean reversion process, the Nifty made a strong technical rebound after taking support at the 50-week MA.

The index is resisting at the 100-DMA and 20-week MA, which are close to each other. Intense selling pressure in the coming week has seen the Nifty retest around the 50-week MA closing just a notch above this point. Nifty should keep its head above this crucial support level to keep its primary uptrend intact. If there is a meaningful breach of this level, we may be in an extended intermediate trend in the coming weeks.

Even if the trend remains weak and the downtrend continues, a modest technical rebound cannot be ruled out. However, it will still keep the markets under a corrective retracement unless some key levels are taken to the upside. It is strongly recommended to keep the leveraged exposure at a moderate level. All new exposures must be very selective, and all gains, even modest ones, must be guarded very carefully. It is also recommended not to rush to short as long as markets are above the 50-week MA, as there is a possibility of a modest technical rebound. A highly 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) shows the Nifty Bank, Financial Services, Services Sector and IT indices within leading quartiles. These sectors are likely to outperform the broader markets relatively.

Nifty Pharma Index is in the weakening quadrant. The Midcap 100 index is also in the weakening quadrant but improving its relative momentum. The Nifty Media, Energy, Commodities, Auto and FMCG indices lag on the inside.

Quarter legging. The consumption index has also moved within the lagging quadrant. These groups are likely to relatively underperform the broader Nifty 500 index.

The Nifty PSE index is also within the lagging quadrant but is improving its relative momentum against the broader markets.

The infrastructure index has entered the improving quadrant and is likely to begin its relative outperformance phase. Realty and PSU Bank indices are also within the improving quadrant. The metal index, which is also within the improving quadrant, is seen to give up its relative momentum sharply.

(Important Note: RRGTM charts show the relative strength and momentum of a group of stocks. In the above charts, they show relative performance against the NIFTY500 index (broad markets) and should not be used directly as buy or sell signals.)

(The author is CMT, MSTA, Consulting Technical Analyst and Founder of EquityResearch.asia and ChartWizard.ae)