Dalal Street Week Ahead: Time to Take Profits? Nifty faces major hurdle after 3-week rally

Markets closed with gains for the third straight week as major indices posted gains extending their technical rebound. Nifty had a trending week; It was trending higher for most of the week. Volatility was largely absent, but the index remained fairly volatile on most days except the last day, where it remained flat. Volatility remained largely subdued; India VIX retreated 1.98% to 14.14 on the weekly note. The range of trade remained wide; The Nifty oscillated in a range of 849 points in the last five

The session headline index finally closed with a net weekly gain of 546.70 points (+2.27%).

Markets have paused themselves at a critical juncture. The Nifty closed above the 50-DMA, which currently stands at 24548. It is just one notch below the 100-DMA at 24707. This level also coincides with the 20-week MA placed at 24720 on the weekly timeframe. So, unless Nifty closes well above 24720, we have to rightly take the zone of 24,700-24,750 as an immediate important resistance for the markets on a closing basis.

To extend this technical rebound, a move past and above 24750 will be necessary for the markets. On the other hand, Nifty has restarted from the 50-week MA; This level placed at 23,432 is the most crucial support for the Nifty if it is to keep the current primary trend intact.

Monday is likely to see a quiet start to the week; The levels of 24,750 and 24,900 are likely to act as resistance levels for Nifty. Support comes at 24,450 and 24,300 levels.

Weekly RSI is at 55.52; It is neutral and shows no differentiation against price. Weekly MACD remains bearish and below its signal line. PPO remains negative.

Pattern analysis of the weekly chart shows that the Nifty has completed the painful process of mean reversion. At one point, the index was trading 10% above the 50-week MA; Nifty tested this level a few weeks back in the current retracement.

The 50-week MA test at 23463 provided strong support and the market rebounded from those levels. Currently, the index has closed below the 100-DMA and 20-week MA. An upward move after the Nifty took support at the 50-week MA saw the index rally over 1200 points. For some, Nifty is likely to consolidate again

The time before it extends the current move. The banking and financial space is exhibiting strong relative strength. While this may continue, sectors like IT, auto, realty etc. will show good momentum in the coming days. However, the index is close to its critical resistance zone; This makes it necessary to protect profits at current levels.

It is important that instead of chasing an all-up move, the prudent thing to do is to protect profits and invest in stocks that show improvement in their relative strength. 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) show that the Nifty Bank Index has rotated within the leading quartile. It is expected to relatively outperform the broader markets with the IT, services sector and financial services indices present in this quartile.

The Nifty Midcap 100 index is improving relative momentum while being placed within the weakening quadrant. The Nifty Pharma index is also in the weak quartile. Nifty FMCG, Auto, Energy, Commodity and Infrastructure indices are included.

lagging quartile. The Nifty PSE index is also within the lagging quadrant; However, it is seen improving its relative momentum against the broader markets.

The Nifty Media Index is back inside the improving quadrant. Besides, metal, realty and PSU bank indices are also placed in the improving quadrant.

(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)