Dalal Street Week Ahead: Dalal Street week ahead: Tech bounce due, but Nifty upside to remain capped

In our previous weekly note, we had projected the market to show limited upsides and talked about the possibility of Nifty slipping into the consolidation mode. The week gone by remained quite volatile and Nifty oscillated in a violent and volatile way for the first four days of the week, showing no clear directional bias.

Just when it was consolidating on the expected lines and in a defined range, a spike in US bond yields on Thursday caused severe weakness in the market on the last day of the week, turning it into one of the worst performances in recent times. At the end, the headline Nifty50 Index ended with a net loss of 462 points, or 3.02 per cent, on a weekly basis.

The weekly market performance was positive until Thursday, but Friday’s 568-point loss wiped out the gains of the first four days, and made Nifty end the week with a sizeable cut. Volatility also spiked significantly on the expected lines. While INDIA VIX had remained largely unchanged in the previous week, it spiked 26.48 per cent this past week to 28.14 level. Although Nifty remains overextended vis-à-vis its short-term averages on the weekly chart, it has tested its 50-DMA, which stands at 14,444 level. The Nifty PCR across all expiries remains evenly placed at 1.01. This means Call and Puts across all expiries have near similar open interest, and this makes the market evenly placed.

Given the kind of vertical decline that we have witnessed, some technical pullback is likely at te start of the coming week. However, going ahead, the upsides will continue to stay capped and limited in its extent. The 14,650 and 14,850 levels will act as potential resistance points; while supports will come in at 14,450 and 14,300 levels.

The weekly RSI stands at 64.52 level. It remains neutral and does not show any divergence against the price. It has slipped below the 70 mark from the overbought formation, and that is a bearish signal. The weekly MACD remains bullish and is above the signal line. However, the narrowing slope of the Histogram points as a deceleration of momentum. A large black candle has occurred on the chart; this showed a general consensual directional bias of the participants.

Despite a 3 per cent decline this week, Nifty has deviated sharply and ahead of its curve on the weekly charts. Pattern analysis showed even the faster 20-week moving average is still ~1,000 points away from the 13,541 mark. It is important to note that this does not imply that the market will decline 1,000 points. However, it does imply that Nifty may oscillate in a defined range as the market consolidates in a broad zone.

On various occasions, we had earlier mentioned about the impending risks that the emerging markets face due to spike in US bond yields. This continues to be a concern along with the resilient US Dollar Index. We recommend continuing to stay light on positions and remaining highly selective and stock-specific while approaching the market. We expect select pockets to midcaps and defensive stocks to show continued improvement in their relative strength against the broader market.

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (Nifty500 Index), which represents over 95 per cent of the free float market cap of all the listed stocks.

A review of the Relative Rotation Graph (RRG) shows Nifty Auto Index is the only one that is currently placed in the leading quadrant. Given the technical structure of the market, it becomes important to understand that merely being placed in the leading quadrant may not mean absolute gains; it means that a particular index / security may just put up a relative outperformance against the benchmark.

Nifty MidCap 100 Index is in the weakening quadrant; but it appears to be turning back and attempting to improve its relative momentum just like the IT Index is doing over the previous weeks. Nifty Financial Service Index, Services Sector, Bank Nifty and the Metal Index are all in the weakening quadrant and may continue to relatively underperform the broader market, barring some few stock-specific shows.

Nifty Media and Pharma index continues to languish in the lagging quadrant. Nifty FMCG and Consumption Indices have also slipped inside the lagging quadrant, as they rolled over from the improving quadrant. All these indices are expected to relatively underperform the broader market.

Nifty Energy Index has rotated inside the improving quadrant. This points to a likely end to its prolonged relative underperformance against the broader Nifty500 Index. Nifty PSE and Infrastructure Indices appear to be steadily maintaining their relative momentum, while being placed inside the improving quadrant.

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)