Nifty may test resistance in range-bound market; Investors should protect profits and remain stock-specific

After forming a potential top and extending weekly losses, markets finally took a breather and closed the week on a positive note. It was a truncated week as 15th August was a trading holiday due to Independence Day. During the last four trading days, markets remained volatile; However, they remained in a defined range, keeping their head above the 50-DMA.

Trading ranges remained moderately high; The Nifty oscillated during these four trading sessions before ending in a range of 464.20 points towards its high point. Volatility cooled down a bit; India VIX retreated 6.08% to 14.40 during the week. The headline index closed with a weekly gain of 173.65 points (+0.71%).

Markets are still in range; However, they are currently trading near the upper end of the defined trading range. Looking at derivatives data, a strike between 24,500 and 24,800 is seeing significant call OI accumulation. Also, any highs from current levels will test the Nifty extended trendline pattern resistance; This pattern is the support that Nifty violated while going down.

This support has now turned into resistance and is expected to resist any upward move in Nifty from current levels. On the downside, the 50-DMA is placed at 24,407. The maximum PUT OI is seen at 24,000 strikes, the zone of 24,000-24,100 is now the most immediate and important support zone for the markets.

A steady start to the week is likely from Monday; The levels of 24,700 and 24,850 are likely to act as potential resistance points. Support comes in at the lower levels of 24,250 and 24,050.

Weekly RSI is at 69.71; It remains neutral and shows no divergence against price. Weekly MACD is bullish; However, the compressed histogram shows slow movement while the index is moving higher.

Pattern analysis of the weekly chart shows that the lifetime high of 25,078 is becoming an intermediate top for the markets. No trending move is likely until this level is convincingly breached. The most important point that draws attention is market breadth.

The cumulative AD line of the broader Nifty 500 index is observed to deviate negatively. This will mean that fewer and fewer stocks are participating in the upward move.

Overall, markets are likely to remain flat in the coming week; However, even if the upward move extends, the markets will be susceptible to a corrective retracement from higher levels. Greater emphasis is now required on protecting profits at higher levels.

While keeping fresh buys highly stock-specific, it would be prudent to focus on stocks that are strong and improving in relative strength.

Leveraged positions should be kept small and prudent. 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 material change in the sectoral setup. The lack of leadership with only the Nifty Midcap 100 index within the leading quartile is a matter of concern.

Nifty PSE and realty index are in weakening quadrant. Besides, the consumption and auto indices are also within the weakening quartile. PSE and consumption indices are improving at their respective paces.

Nifty Bank Index is back inside the lagging quadrant. It is set to relatively underperform the broader markets. Nifty Metal Index has moved inside the lagging quadrant. Nifty Commodities, Energy, PSU Banks and Infrastructure Index are also within the lagging quadrant. Some of these are seen improving their relative momentum against the broader markets.

Nifty services sector, pharma, media, financial services, FMCG and media indices are within the improving quartile. They are poised to continue improving their respective performances next week.

(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.)

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