market outlook: Dalal Street Week Ahead: Use rallies to take money off the table, instead of buying afresh

Nifty’s trading range remained wider than usual during the week gone by, but it took a serious cut on Friday’s session. Despite that, the index managed to close the week on a positive note. In the previous weekly note, we had mentioned that Nifty was trading inside the Falling Channel that it had created, and any decisive move above the 15,000 mark would offer cues about the market’s upward move.

However, the index has failed to move past that point and stayed inside the channel. Following a rangebound week, the headline index finally ended with a net gain of 289 points (+2.02%) on a weekly basis.

In the week before this one, Nifty had violated an important pattern support that comes in the form of a Rising Trend Line drawn from the lows of March 2020. Despite the violation of this pattern support, Nifty averted weakness this time by managing to hang around precariously near this trend line.

Volatility has risen and INDIA VIX has grown marginally by 1.49% to 23.0300 level. For the coming week and beyond, it would be crucially important for the 50-pack to stay above this trend line, and any failure to do so will increase the possibility of violation of the Falling Channel that the Nifty is in. This can also invite incremental weakness in the market.

Nifty is likely to start the coming week on a soft note and the 14,730 and 14,900 levels are likely to act as key resistance, while the 14,500 and 14,350 levels are likely to offer supports. In the event of any corrective move, this trading range is likely to widen. The weekly RSI stands at 58.86; it stays neutral and does not show any divergence against the price. The weekly MACD remains bearish and stays below the Signal Line.
A Shooting Star formation has emerged on the candles. Such a formation would occur when the price shows a gapup start, trends higher, but closes much lower being unable to sustain the gains.

Since such a candle has emerged near a pattern resistance level, it can have bearish implications. However, as always, this would require confirmation on the next bar. Pattern analysis showed Nifty is inside a channel that it has formed; and it has not been able to break out of this channel and is clinging on to an important pattern support of a trend line that begins from March 2020 lows and joins the subsequent higher bottoms.

All in all, Nifty is within a corrective retracement following the formation of the high point at 15,431 level. While the market is in seeing such a retracement, the out-of-control Covid situation in the country is hitting investor sentiment hard. There is a clear shift in preference towards the traditionally defensive stocks.

We recommend staying highly stock-specific and keeping fresh purchases limited to low-beta and defensive stocks. All rallies should be used more for taking some money off the table rather than making fresh purchases. While keeping the overall exposures at a modest level, a highly cautious outlook is advised for the coming week.

In our look at 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.

TJE review of RRG showed only Metal, Midcap100 and the Commodity Indices are showing steady relative momentum while being placed inside the leading quadrant. Energy, Infrastructure and PSE Indices are inside the leading quadrant, but they all appear to be losing their relative momentum against the broader market.

Nifty PSU Bank, Realty and Nifty Bank Indices are all inside the weakening quadrant. All of them appear to be rotating south-west and giving up their relative momentum against the broader market. They are likely to relatively underperform the broader market.

Nifty Financial Services index has rolled inside the lagging quadrant, while the Auto Index is languishing inside this quadrant. Nifty IT and Media indices are also inside this quadrant, but they were seen improving their relative momentum against the broader market.

Nifty Consumption Index has just rolled inside the improving quadrant. It joins Nifty Pharma and FMCG indices, which are also inside the improving quadrant. They appear to be steadily maintaining their relative momentum against the broader market. They are likely to show a resilient performance and relatively outperform the broader market.

Important Note: RRGTM charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance against the 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)