Nifty stalls near highs as record low VIX signals risk under calm markets

Last week, markets traded largely narrow and listless, with the Nifty ending the week with marginal gains.

The index oscillated within a very tight range of just 227.80 points to a high of 26,236.40 and a low of 26,008.60. Given the lack of directional cues and participation, action remained largely stock-specific, and motion was selective.

Meanwhile, the India VIX fell another 3.91% on a weekly basis to close at 9.15, its lowest level, signaling complacency in the system. For the week, the Nifty ended with a modest gain of 75.90 points or 0.29%.

The current structure of the market indicates a stall condition rather than an active trend. Despite trading slightly below lifetime highs, the Nifty appears to be in the zone of uncertainty, with an apparent squeeze in momentum and continued weakness in broader market breadth; The Nifty 500 continues to lag and is about 3% away from its own high.

The index is trying to stay above the upper breakout zone, but the follow-through remains weak. There is no clear bearish setup yet, but an up-move lacks certainty. Importantly, India VIX near multi-year lows calls for caution; A low VIX does not imply low risk; It often precedes volatility spikes. Markets are not trending with strength and any adverse trigger could weaken the index to elevated levels.

Given the current formation, markets may see a cautious or flat start to the week ahead. Two resistance levels to watch are 26,250 and 26,430, while support is expected near 25,880 and 25,680. A directional move would require a strong breach above or below these reference points. Until then, the index may continue to remain rangebound and susceptible to mean-reversion moves if sectoral leadership does not improve.

The weekly RSI remains at 60.84 and remains neutral, showing no divergence against price. It is not overbought and continues to maintain its bullish range. The weekly MACD remains above the signal line, indicating a positive setup, but the histogram bars are narrowing, reflecting declining momentum. No classical candlestick formation has emerged on the weekly chart, indicating uncertainty and consolidation at higher levels.

From a pattern perspective, Nifty has broken above a large symmetrical triangle on the longer time frame and is currently consolidating above its breakout zone. This zone is roughly between 25,600 and 26,200. The index continues to trade above its major moving averages, including the 20-week, 50-week and 100-week MAs. However, lightly compressed Bollinger Bands reflect suppressed volatility, which is usually a precursor to a big move in either direction.

Given the technical landscape, it would be prudent to avoid aggressive index-level exposure at this time. Traders and investors should adopt a stock-specific approach, focusing on relative strength and risk-adjusted opportunities. With a lack of broad-based participation and extremely low volatility, protecting profits should be a priority over chasing extended moves. Approach next week will be to remain cautiously optimistic, maintain trailing stops and wait for a decisive breakout or healthy pullback before committing to new capital.

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) indicate that Nifty Financial Services, Midcap 100, PSU Bank, Nifty Bank and Infrastructure indices are in the leading quartile. Despite a slight slowdown in relative momentum in pockets such as financial services and banks, the overall structure remains unchanged. These groups are likely to outperform the broader markets.

Nifty metal and auto index are inside the weak quartile. Stock-specific shows will continue; However, auto related operations may continue to see a slowdown. However, the metal index showed improvement in its momentum against the broader markets.

The realty index has moved into the lagging quadrant. Nifty Commodities, FMCG, Energy, Consumption, PSE and Media Indices are in the lagging quadrant. The media index has started to show a sharp improvement in its relative momentum after a long period of relative underperformance.

The IT index, the only sector index in the improving quadrant, is moving strongly towards the leading quadrant, maintaining a resilient relative pace.

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 Consulting Technical Analyst)

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