Dalal Street Week Ahead: Low VIX level is a sign of worry; auto, bank, realty may look up

It was for the third week in a row that the Indian equity market continued with its winning streak. The week gone by saw Nifty50 scale a fresh high and end at a new lifetime high. This has left the Indian headline index in the uncharted territory.

Nifty traded in a 359-point range, and the market maintained its trajectory throughout the week, barring few incidents of consolidation on the daily chart. The index went on to end the week on a strong note; the Nifty50 gained 234 points, or 1.52 per cent on a weekly basis. If we sum up the gains, the index has piled up a total gain of 992 points over the past three weeks.

The price action has seen Nifty support levels getting dragged higher to the 15,450-15,500 zone. For the current upside to sustain, it would be crucial for the index to keep its head above these points. While Nifty has consolidated, Options data threw up some interesting insights. The 15,700, 15,750 and 15,800 levels saw significant Call writing of 1.40 million, 1.2 million and 1.6 million, respectively. The 15,700 level held maximum Call Open Interest at 3.5 million shares. This is likely to keep upside limited in the coming week.

Volatility continued its southward move. INDIA VIX came off 8.40% to 15.9400; this remains the lowest level, last seen only in February 2020.

Nifty is likely to face strong resistance at the 15,750 and 15,820 levels in the coming week, while supports will come in at 15,500 and 15,410 levels. In the event of any consolidation or a corrective move, the trading range is expected to get wider than usual.

The weekly RSI stood at 68. It has made a new 14-period high, which is a bullish indication. The RSI, however, remains neutral and does not show any divergence against the price. The weekly MACD is bearish; it currently remains below the Signal Line. However, the sharply narrowing slope of the Histogram hints at a likely positive crossover in the coming weeks. A Strong White Candle emerged; it reflects the directional consensus that prevailed throughout the week among the market participants.

Going by the technical setup, there are no signs of weakness on the charts if they are read in isolation. However, what one cannot ignore is the fact that the lowest value of the VIX that we see at present was last seen only in February 2020.

A prolonged period of low volatility is often followed by highly volatile periods. This may cause the market to either consolidate or see measured corrective move at higher levels. This is one of the major things that market participants will need to guard against in the coming weeks. The defensive sectors are likely to find favors as a distinct improvement of relative strength is seen in these pockets. A cautiously positive view is advised for the week ahead.

A review of Relative Rotation Graphs (RRG) showed the IT Index has rolled back inside the improving quadrant from the leading quadrant. The NIFTY Pharma is the only index that is firmly placed inside the leading quadrant. The Metals, SmallCap and the Commodities Indices are inside the leading quadrant, but they appear to be taking a breather and paring their relative momentum against the broader market.

Nifty PSE, Infrastructure and the MidCap 100 Indices are trading inside the weakening quadrant. The PSU Bank Index is also inside the weakening quadrant, but it is trying to consolidate its performance.

Nifty Services Sector, Bank Nifty, Realty, Financial Services and Auto Indices are inside the lagging quadrant. However, they have stopped rotating southwest. They are seen trying to improve their relative momentum against the broader Nifty500 Index. Only the Energy Index is seen languishing inside the lagging quadrant.

Nifty Consumption and FMCG Indices are inside the improving quadrant. However, they appear to have stalled their move. Nifty Media index is also inside the improving quadrant and appears to be maintaining the northeast direction of the rotation.

One can expect to see selective outperformance from auto, financials, pharma and consumption pockets in the coming week.

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 markets) 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)