Markets face a challenging setup; Focus on resilient stocks for safety

Overly volatile markets continued to extend their losses for a fourth straight week. Over the past five days, the Nifty has mostly been under constant selling pressure, barring a few weak attempts to stage a technical rebound. Markets extended their downsides, providing key support on the daily charts.

The range of trade expanded again; The Nifty oscillated in a wide range of 904-points before ending with a decent cut. The volatility also spiked; The India Vicks rose another 12.23% to 14.63 on a weekly basis. Following a largely bearish setup throughout the week, the headline index closed with a net weekly loss of 673.25 points (-2.71%).

The coming week is cut off; Friday is not a trading holiday but it will have a very short formal mahurat session of only one hour. Overall, volume is expected to remain low considering the festive season. Nifty has breached the 100-DMA on the daily chart which is at 24591. It has already breached the 20-week MA which stands at 24702.

Given these adverse technical developments, the Nifty has pulled its resistance levels much lower in the 24500-24700 zone. Any technical rebounds will find resistance here. In other words, as long as markets trade below this zone, all rebounds are more likely to be sold.

Next week could see a dull start; Levels of 24450 and 24650 are likely to act as resistance levels. Support is expected to come at 23950 and 23700. Trading ranges are likely to be wider than usual.

The weekly RSI is at 49.95. It has formed a fresh 14-period low; However, it remains neutral and shows no divergence against price. The weekly MACD is bearish and trading below the signal line. Pattern analysis shows confirmation as an intermediate top for the markets. The decline has also seen Nifty breaking pattern support at 24750 level. This pattern support is in the form of a rising trend line that starts at 22124 and extends itself. The 20-week MA and 100-day MA are also meaningfully violated on a closing basis. Resistance levels have been pulled low; All technical rebounds will find resistance in the 24500-24700 zone from a short to medium term perspective.

Markets have entered a technical setup that is likely to create a challenging environment. A risk-off setup is obvious; It will be imperative to invest in stocks with strong relative strength against the broader markets. Such investments will provide greater resilience if weakness in the markets continues for an extended period of time. While remaining highly selective; 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.

Relative rotation graphs (RRG) continue to show some pockets of resilience in markets. Nifty services sector, pharma, consumption and IT indices are within the leading quartile. They may continue to outperform the broader markets relatively.

The Nifty FMCG index has moved into the weakening quadrant. Besides, the Midcap 100 index is also the weakest quartile. Nifty auto and media indices have turned inside the lagging quadrant. This group is likely to underperform with Energy, PSE and Energy.

Infrastructure, commodities, PSU banks and realty indices are also within the weakening quartile. However, they are seen improving their relative momentum against the broader markets.

Nifty banks, metal and financial services indices are in the improving quartile; They 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, 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. views are own)

(disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. (These do not represent the views of The Economic Times)