Nifty Analysis: Dalal Street week ahead: Nifty bound to consolidate now; stay aside for a while

During the week gone by, the market behaved in stark contrast to the behaviour seen in the previous week, as Nifty again scaled new highs and closed with robust gains. The previous week had seen the headline index decline tank 737 points. Over the past five days, the market gave a thumb-up to the Union Budget. All through these five session, Nifty witnessed a parabolic and vertical rise. The index tested the psychologically important 15,000 mark on Friday, as it hit a new intraday high of 15,014 before coming off from that point. The index ended the week on a very strong note with a net gain of 1,289 points, or 9.46 per cent, on a weekly basis.

For the coming week and after that, market participants will have to keep in mind a couple of things as they approach the market. Nifty has risen over 1,200 points one way, and its coming off a bit as part of consolidation should not be surprising. Along with that, the weekly options data suggest a high amount Call writing at strike prices 15,100 and 15,200 while strike price 15,000 continues to see maximum accumulation of Call Open Interest. This means even if there is more upside, it will be limited in its extent. Last but not least, the Dollar Index has sharply rebounded following a strong bullish divergence of the lead indicators. The US Dollar Index may not stay weak, but if it strengthens, it may not be a big positive for emerging markets.



Nifty may move in a wider trading range than usual in the coming week and the 15,000 and 15,190 levels will act as key points of resistance, while supports will come in much lower at 14,700 and 14,610 levels.

The weekly RSI stands at 73.02, and it shows a bearish divergence against the price. The price has closed at a fresh high, while the RSI has not done so. The RSI has again entered the overbought zone. The weekly MACD remains bullish and trades above the Signal Line.

A Large White Body has emerged on the candle. This shows a firm bullish consensus among the market participants.

Pattern analysis showed given the sharp parabolic bounce, Nifty has once again deviated far off its nearest mean. This is evident from the Bollinger bands, which are much wider than normal. This shows increased volatility in the weeks ahead. The longer these bands remain wider than normal, the higher are the chances of them returning within the normal range. The fastest weekly moving average, i.e., the 20-week MA, stands at 13,027, a good 1,900 points lower than the current level.

What we witnessed over the past five days is a reactionary move following the Union Budget. If Nifty continues with the momentum, we recommend staying away from creating any fresh exposure in the frontline high-beta stocks even at the cost of feeling left out. There are greater chances of getting stuck at higher levels as a corrective consolidation is overdue.

There has been a strong pickup of momentum in the FMCG, pharma and consumption stocks, considered defensive bets. The improvement of the Relative Strength Index of these sectors against the broader market may continue to improve in the coming week as well. We recommend staying light and approaching the market in an extremely cautious and stock-specific manner.

In our look at the Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 Index), which represents over 95% of the free-float market-cap of all the listed stocks. The review showed except for Nifty PSU Bank Index and Auto Index, which are firmly placed in the leading quadrant, no other sectoral index is placed so firmly. The Nifty Realty index is in the lading quadrant, but it appears to be paring its relative momentum. The Nifty Metal and MidCap100 Indices are also giving up on their relative momentum despite being in the leading quadrant.

The Nifty Financial Services, Services Sector indices and Bank NIFTY have slipped inside the weakening quadrant, indicating a likely end to their relative outperformance against the broader Nifty500 index. The IT Index is also inside the weakening quadrant, but it continues to improve its relative momentum.

The Nifty Energy pack is seen taking a negative turn from the leading quadrant and may slip into the lagging quadrant once again. The Pharma group is also inside the lagging quadrant, but it appears to be consolidating its performance.

While the Nifty PSE Index appears to be taking some breather, the FMCG, Consumption, Media and Infrastructure indices appear to be placed comfortably inside the improving quadrant, and may show stock-specific outperformance going ahead.

Important Note: RRGTM charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance against Nifty500 Index (broader market) and should not be used directly as buy or sell signals.

(Milan Vaishnav, CMT, MSTA is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)