weak markets; Caution is advised amid possible rebound and selling pressure

Indian benchmark Nifty 50 extended its corrective decline. In the last four sessions of the truncated week, the Nifty 50 index was largely under selling pressure. During the last week, markets continued their mean reversion process.

Volatility, however, did not show any major jump. The volatility gauge, IndiaVIX rose a modest 2.11% to 14.77. Trading ranges last week remained broadly on expected lines. Nifty oscillated in a range of 852 points. It closed with a net weekly loss of (-615.50) points (-2.55%).

Next week is also cut off. Wednesday, November 20th is a trading holiday due to assembly elections in the state of Maharashtra. Markets are going through a painful mean-reversion process. As of now, though the Nifty has closed a notch below the 200-DMA which is currently placed at 23555, it has managed to protect this important support.

Further, the Nifty is within a significant gap of the 50-week MA which currently stands at 23253. Even if the index tests this level, the long-term primary uptrend will still remain intact.

Two possibilities stand out; A relief rally in the form of a technical pullback cannot be ruled out; In the same breadth, markets remain weak and vulnerable to extended corrective pressure.

On Monday, the Nifty will conform to the global market setup as it opens after a gap of one day. The levels of 23650 and 23780 can act as potential resistance points. Support comes at 23250 and 23000 levels.

Weekly RSI is 43.26; It made a fresh 14-period low which is bearish. It also remains neutral and shows no divergence against price. The weekly MACD is bearish and remains below its signal line.

An expansion histogram shows rapid movement during a downtrend. A long black streak came over the candles; This shows the strength of the trend on the downside. Pattern analysis shows that Nifty has unsuccessfully tried to defend its 200-DMA though it has closed slightly below this important point. Any further losses could see the index test another important support level of the 50-week MA which is placed at 23253. Further, the index has taken support on the extended trendline which is also near the 50-week MA.

Overall, markets are trading with a weak undercurrent. A technical rebound and relief rally cannot be ruled out; However, markets are also susceptible to sustained selling pressure and a test of lower levels cannot be ruled out.

Market breadth remains weak and this is a concern as all technical rebounds can be sold if breadth remains weak. It is strongly recommended that all leveraged exposures be reduced.

any technical rebound; As and when it happens, it should not be chased and all benefits should be protected from the mind. Extreme 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) show a largely unchanged sectoral setup. Nifty services sector, pharma, financial services and IT sector indices are within the leading quartile.

They are likely to continue to outperform the broader markets relatively. Nifty Consumption, Midcap 100 and FMCG indices are in the weaker quartile. These sectors are expected to continue to shed their respective operations in the coming weeks.

Realty, Infrastructure, PSE, Media, Auto, Commodities and Energy indices are within the lagging quadrant. Among these, commodity, energy, realty and infrastructure indices are seen improving their relative momentum against the Nifty 500 index. Bank Nifty, PSU Bank and Nifty Metal Index are in the improving quartile.

Their relative performance can be expected to gradually improve in the coming weeks. 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)

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